The Housing Market Will Improve with Lower Prices, not Lower Interest Rates 33 comments
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I received a link to this article on Twitter from Paul Kedrosky, author of Infectious Greed, on John Taylor’s criticism of the Federal Reserve’s recent monetary policy. I was drawn to the post because of the chatter that I hear from residential mortgage brokers applauding cheaper money (a.k.a. lower interest rates) -- their belief that sub-5% mortgage rates will spur housing demand. (Much more on this shortly...)
The article described Taylor’s criticism as published in his most recent paper. This is particularly poignant because this criticism comes from John Taylor of the Taylor Rule.
The Taylor Rule is a simple rule for determining the federal funds rate:
Using the Taylor Rule, the current federal funds rate would be calculated at approximately 4.5% (assuming that a natural rate of GDP growth is 3.5%, with inflation calculated in October 2008 at 3.66% and current GDP growth at -0.5%).
With current rates well under 2% and looking at a historical graph of the Federal Funds Rate since 2000, we are still well below the level estimated by the Taylor Rule and have been for several years, thus the reason for Taylor's scorn.
Going back even further to the 1990's, we see that that Federal Funds Rate more closely followed the Taylor Rule recommendation:
(Source: Gregory Mankiw's "Macroeconomics" 4th edition)
It was the Federal Reserve's policy starting in 2001 that irked Taylor, to put it lightly. More so, the Federal Reserve has been dropping its target Federal Funds rate lately in an effort to combat recessionary pressures. This has perceived implications in the real estate industry by many mortgage brokers out there, as mentioned above.
Here's the catch - the demand for money in the housing market is probably not the problem right now, because the aggregated buyer demand will not change unless lending requirements change at the current price levels. There are a fixed number of buyers in the market to which lenders will approve and make loans. Lenders are offering few indications that they will be loosening lending requirements in the near future, and so we can't expect new buyers to enter the market simply with cheaper money available.
However, there are buyers at lower home price levels that would qualify for a loan if the overall price of homes were lower. For example, assume that there is a fixed supply of homes on the market (say 1,000,000 homes) and assume that all of these homes were all priced at $250,000. There are a certain number of buyers that are willing and able to buy a home at this price (meaning that they are actually receiving loan approvals), but given the surplus of inventory on the market, it appears that the number of buyers is below our assumed supply of 1,000,000 homes.
Now, if the price of these 1,000,000 homes for sale dropped to $200,000, then basic economics tell us that more buyers become willing and able to buy homes. That is, some buyers that would not be approved to purchase a $250,000 home would be approved to buy a $200,000 home, simply because income requirements are lower for the buyer at the lower home price. The profile of the buyer doesn't change for the lender under their stricter lending requirements - strong credit scores and meeting income level requirements - there's just more buyers when home prices drop overall.
The cheaper money will decrease the final price of homes to the eventual buyers, even if the actual sold price of homes does not change. This is because the lower interest rates will result in a lower long term mortgage payment. As many Realtors have told their buyer clients - the final price of the home matters far less to you monthly than does the monthly payments that you will be making for the next 30 years. That said, lowering interest rates to make money less expensive won’t spur housing demand in a drastic way.
This would indicate that the fundamental issue in the housing market is total quantity of homes demanded from qualified buyers as determined by the money suppliers – banks and lenders. Only buyers that will be approved are part of the buyer pool, the rest are just lookers. With more stringent (and responsible) lending requirements, the question is whether the true number of buyers in the market is numerous enough to purchase the existing supply. Given that suppliers (home sellers) are continuing to drop their prices, it would appear that the real number of qualified buyers are less that required for the housing market to find equilibrium.
Here's an illustration of this example, courtesy of my AltosXplorer application from Altos Research (shameless plug):
This graph illustrates the point of fixed supply and declining prices. Using a 90-day rolling average value for both Median Price and Inventory, we can see that Inventory has mostly leveled off since the end of 2007, but prices are still falling at a constant rate. There are just no buyers for the homes on the market at the price levels. As such, the suppliers (home sellers) are adjusting their prices until they will reach a clearing price where willing, able, and funding-approved buyers will enter the market and begin purchasing homes.
To bring this back to John Taylor and his target for the Federal Funds rate - the problem with the housing market will likely not be improved with a decrease of interest rates, and cheap money bears considerable responsible for the housing price mess. Instead, long-term relief has better prospects with lower price levels that will clear the market.
Just one man's perspective.
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This article has 33 comments:
My analogy is whatever brings the payment down is what works.
If the R/E Mkt really implodes to drain the rest of America's Savings, God Help the Baby Boomers & the Govt that is going to have to address this Problem. 4.5% across the board for all even if it has to go long for 40yrs then the Loan is Paid Back & the People-People Stay in Their Home. The average time of a Home Owner in a Home is 8.5 yrs.
So lets see? You bought a home 6 yrs ago, you have been quite happy where you are, then you are forced to move b/c you job did...You should lose all your equity? You should let it go back to the Bank? You should stay in the house w/no income??? This is Destroying Wealth of Innocent People who have done the Right Things. Not the people who Must Sell b/c of the Move for the Job...The Entire Neighborhood! This is the kind of reasoning that is just Stupid. Some areas are down by 40% today, others have 21% foreclosure...this is wholesale destruction of wealth for the benefit of the Banks by the reasoning of this article.
The rule of 72 works w/any intrest rate. The Bank gets all of it's initial investment back w/in 72 mos which is 7yrs. They did this to our Children & I think it is about time they didn't take everything away from them by way of debt. Give them a Credit Card @ 18-19...By the time they are out of College they are up to their ears in debt, w/cards & student loans. They get a job & buy a house...Now this? Apparently, we Eat Our Young, to hell w/anyone but ourselves. You see the problem here is that they have their own kids now, they are in their 30's. If you are insulated, Look Around you. There are entire displaced Family's living in Cars! Grapes of Wrath you say? There is a Damn Good Reason the Mort Brokers are Fighting this for the people as best they can. Some are really good credit risks w/great properties, w/great locations. No one young could have planed for this. Older people attempting to educate their kids drew $ out as well, 5% decline OK, 10% decline...OK, but people never expected to be completely unable to sell a Really Nice Property @ any price in some area. I see the sharks say...there is always a price @ which it will sell, yes there is but not if You Can't Find a Qualified Buyer!
If people get the clever idea that they will be wiped out no matter what they do...They will get as much as they can before they do, thereby wrecking what's left of the Financial System. This is the Only time I have ever been really irritated w/an Article & my most aggressive post so far. Prices are down & will go down more. What we need is the TARP $ Forcing Banks to Refinance if they receive the Money NOW. This is only fair as the Tax Payers have put these funds up to Save the System.
R-rrr
Think before you write?
seekingalpha.com/artic...
going forward anyway...its too late to correct our problems as a final comment from me...we are in a DEPRESSION and its only going to get worst going forward...MarvinMBA
On Dec 26 08:55 AM Kinja Rules wrote:
> Great Idea! Destroy the Value of all property so that the mkt can
> clear. Therefore the foreclosure rate hits 25% or more. Brilliant!
> The Best Interests of the Banks are Served best by lowering rates
> & refinancing those that don't have to become REO. This has to
> happen to clear the mkt of the people w/unsellable homes, but the
> ones who have homes they can rent or sell to make the full value
> of the loan should be refinanced. What are you thinking??? When Dr's
> are losing homes b/c of forced moves in an illiquid mkt, we have
> a Serious Problem. The other minor pt is that people who have held
> a Credit Score over 700 until the last yr should be considered on
> that basis as well. These Are Responsible People Caught in an Unseemly
> Situation.
>
> If the R/E Mkt really implodes to drain the rest of America's Savings,
> God Help the Baby Boomers & the Govt that is going to have to
> address this Problem. 4.5% across the board for all even if it has
> to go long for 40yrs then the Loan is Paid Back & the People-People
> Stay in Their Home. The average time of a Home Owner in a Home is
> 8.5 yrs.
>
> So lets see? You bought a home 6 yrs ago, you have been quite happy
> where you are, then you are forced to move b/c you job did...You
> should lose all your equity? You should let it go back to the Bank?
> You should stay in the house w/no income??? This is Destroying Wealth
> of Innocent People who have done the Right Things. Not the people
> who Must Sell b/c of the Move for the Job...The Entire Neighborhood!
> This is the kind of reasoning that is just Stupid. Some areas are
> down by 40% today, others have 21% foreclosure...this is wholesale
> destruction of wealth for the benefit of the Banks by the reasoning
> of this article.
>
> The rule of 72 works w/any intrest rate. The Bank gets all of it's
> initial investment back w/in 72 mos which is 7yrs. They did this
> to our Children & I think it is about time they didn't take everything
> away from them by way of debt. Give them a Credit Card @ 18-19...By
> the time they are out of College they are up to their ears in debt,
> w/cards & student loans. They get a job & buy a house...Now
> this? Apparently, we Eat Our Young, to hell w/anyone but ourselves.
> You see the problem here is that they have their own kids now, they
> are in their 30's. If you are insulated, Look Around you. There are
> entire displaced Family's living in Cars! Grapes of Wrath you say?
> There is a Damn Good Reason the Mort Brokers are Fighting this for
> the people as best they can. Some are really good credit risks w/great
> properties, w/great locations. No one young could have planed for
> this. Older people attempting to educate their kids drew $ out as
> well, 5% decline OK, 10% decline...OK, but people never expected
> to be completely unable to sell a Really Nice Property @ any price
> in some area. I see the sharks say...there is always a price @ which
> it will sell, yes there is but not if You Can't Find a Qualified
> Buyer!
>
> If people get the clever idea that they will be wiped out no matter
> what they do...They will get as much as they can before they do,
> thereby wrecking what's left of the Financial System. This is the
> Only time I have ever been really irritated w/an Article & my
> most aggressive post so far. Prices are down & will go down more.
> What we need is the TARP $ Forcing Banks to Refinance if they receive
> the Money NOW. This is only fair as the Tax Payers have put these
> funds up to Save the System.
>
> R-rrr
>
> Think before you write?
This is an important statement that many of the commenters are ignoring. A recent SA article by Steven Hanson ("A Tale of Two Housing Bubbles")
seekingalpha/article/1...
addresses some of the serious overhang pressure on the housing market from the large number of second homes and investment homes owned by baby boomers. In that article a link is provided to another important article by Spengler that further addresses the demographic headwind that the U.S. real estate market is facing.
Bottom line: interest rates and historical price comparisons are merely the cosmetics on the face of U.S. residential housing problems.
Scott - - -
I have read both of your articles, and was not excited about the first one. This one is much better and adds to my insight into the housing market outlook. I particularly like the graph comparing price and inventory. In my opinion, an impaired demand facing an inventory overhang is the real problem for the next several years in residential housing. Interest rates are secondary.
A) A $500K house, $100K down, $400K financed with fixed 30-year @ 4% = $1,900/month payment.
B) Same house purchased for $300K, same $100K down but now only needing a $200K mortgage, let's say financed using a 30-year fixed mortgage at 11% = $1,900/month payment.
Although the resulting monthly payments are identical, the inputs are very different indeed. Your risk is obviously lower putting less principal at stake. The lower rates argument is merely another desperate attempt by those trying to prop up real estate (i.e. keep it still up in bubble territory). People have figured out this realtor payment spin...
On Dec 26 11:22 AM John Lounsbury wrote:
> PS
>
> Scott - - -
>
> I have read both of your articles, and was not excited about the
> first one. This one is much better and adds to my insight into the
> housing market outlook. I particularly like the graph comparing
> price and inventory. In my opinion, an impaired demand facing an
> inventory overhang is the real problem for the next several years
> in residential housing. Interest rates are secondary.
insurance, Mello-Roos Districts, homeowners dues, points on loan? All these are applicable in So.California anyway. The gov't is trying to fix prices, desperately trying to stop the slide. It is FUTILE! They need to be told, including Obama, he can't spent up to a trillion we have to BORROW, PRINT, FLOAT! Smart Americans
under water should walk away NOW and rebuild their credit. Rent for 1/2 or less, do it as easy as you can on the kids if they need to transfer school districts. The gov't/Paulson/Fed is trying to keep you in a home that's $150-200K underwater, and it WON'T GET EVEN IN 15 YEARS. Take that to the bank. Been in real estate since 1980, worked for almost all major public homebuilders. Wages would have to rise significantly to get back $150K+ in lost equity. Give it up. It's a cut and dry business decision.
The solution needs to be a combination of both--allowing free markets to set the fair price for a primary dwellings and providing strong incentives for young persons to invest in their first home. I emphasize young only that we need to get the youth of America ingrained in property ownership to keep the country healthy (and hard working) for generations to come--they'll have to be to respond to the enormous economic challenges facing the next generation.
A banker's perspective would be to look at area cap rates, and see if they are sustainable. Then, they would compare with their own cost of lending. It's all a business at that end, and the economics, at least in the bubble zones, are still absolutely horrendous.
To even suggest that anyone in the housing market would even consider ignoring either price or rate is the hallmark of stupidity. Both must be considered, and either can make or break a deal. America's problem, and indeed most of the world's (in regards to real estate), is that they ignored price to their own peril.
On Dec 26 08:42 AM msoori wrote:
> This article is just a bankers point of view how things should be.
> It is naive and wishful thinking on the banker to even suggest that
> the buyer wouldn't care about the interest rate. The smart buyer
> looks at both interest rate as well as the price, while the gullible
> may only consider the price part of the equation.
Given that the buyer should beware, it would follow that customers should be very wary of something that the seller would love to sell. But...amazingly, borrowers fell in love with ARMs in a way that bankers didn't even dream about. It almost frightens me how many people in America are addicted to their monthly payment.
There are two types of buyers:
1. People who buy houses to live in. They need the total payment (mortgage, taxes, maintenance) to be reasonable relative to rent. The house is bought for psychological reasons (stability) and as a hedge against inflation.
2. People who buy houses to rent (investors). They need rent to cover, more or less, mortgage, taxes, maintenance, and real depreciation (about 0.7% per year).
There is another kind, speculators, or "flippers", but they can only survive in a highly appreciating housing market and should by now have disappeared.
When property values deteriorate rapidly normal people will wait and not buy (deflation hazard).
The exception to that is an event where there is a high return on investment for investors. If an investor can buy a property where he gets 20% ROI from rent after taxes, maintenance, mortgage, and management fees, he is not going to wait any longer for prices to drop.
So, what needs to happen is the following:
1. calculate the value to a renter of buying real estate, including the inflation hedge. There can be large variation on the assumptions. The more restrictive the assumptions are, the less buyers there are.
2. calculate the value of the real estate for a buy and hold investor. It should be lower than for the ex-renter.
If the down payment + ongoing expenses make sense instead of rent, and house prices are falling, they will not buy. House prices have to stabilize first.
The investors are the people who will stabilize the market - at a certain level buy and hold will make money even if home prices go down even more.
Unfortunately, the historical investor safety net has big holes in it. There is practically no way even for Warren Buffett to get a 5th mortgage after he took loans on 4 properties. That is why you can see in some areas huge bargains and no buyers - no loans to the buyers since the government agencies and the PMI companies tightened their guidelines, so no buyers, so continued fall in house prices.
There is no infrastructure for residential loans that are not commercial, and once the government plans were pulled, there is no way to get credit.
Conclusion:
In some areas, for example southern California, house prices are still too high and may fall more.
In other areas, like in Texas, the government, under the cloak of "responsible" guidelines, is ecouraging the decline in house prices.
Local governments wanted higher property taxes via assessments,
and the lending industry was de-regulated, allowing all the scam loans.
So one of the few stable assets in this country was allowed to go "speculative".
We now have the results.
Expect this mess to take years to regain the confidence of the public. Prices will trickle down or go flat for years at this point barring some new backed government gimmick. Years of overbuilding has diluted the demand and ruined it for the people who stayed.
One last thing people tend to forget: owning that home costs quite a bit
more than 10 years ago. Think much higher taxes, much higher insurance,
water and utility bills that double every few years, higher maintenance,
stricter code enforcements. Expect those "hidden costs" to get much
higher down the road.
First, not all housing is the same. Looking at the real estate market as a homogenous market is apt to give you faulty conclusions. Where I live, the low-end housing is not a problem, but once you get over 500K, the inventory spikes up from months into years. To the extent that pricing is part of the problem, lowering interest rates will not be a significant solution because it works on all real estate not the real estate that is the problem.
Second, if housing were wheat, lower price would generate more demand. The problem is that housing isn't wheat. When housing prices fall across the board, you have foreclosures. Foreclosures add layers of overhead to the mix. Adding overhead cost to housing, isn’t apt to fix the housing crisis.
Third, what you are overlooking is asset productivity. Asset value is a function of productivity. Foreclosures are less productive than rentals. Rentals are less productive than owner occupied properties (trust me I have rented property). Driving houses into foreclosure is most likely to dilute bank capital, which is needed to finance home purchases.
Capitalism likes stability and predictability. I don't have a solution to foster either, but your solution is apt to give us less of both. The govt's efforts are counterproductive. The reality is this the solution will be about making housing worth more not less.
However, in short, the major considerations for housing are affordability, future economic perceptions and Demand or more precisely lack of demand.
As the Baby Boomer generation move from Peak earning & Spending capacity, into thrifty retirees and then finally keave us forever, the demand growth will falter, then go into reverse.
It will take years!
Owner 1: Has had the Property for many yrs, w/fixed rate loan...Needs to move to another City. Over Supply is Driving Prices Below what the Owner Must get to Rent the House, selling isn't going very well.
Owner 2: Took out an ARM 2 yrs ago which is resetting, they have little/no equity in the home & they can't make the new reset payment.
There are many other types of owners. I use these 2 examples b/c Owner 1 has equity, but can not rent w/o a refi. House will be able to be sold in a yr or two as it is in a really good area. Owner can not make the negative cash flow. This person should be refi'd @ a lower rate as they are an Excellent Credit Risk & the Crisis has been the real problem.
Owner 2, made a dumb loan & bit off more than they can chew but they aren't underwater on the house. To Refi the existing owner @ a lower fixed rate is a good plan right now. Assuming the people really want to stay in the house.
If we allow the Inventory to Explode due to Foreclosure Rates any more than what has to be we lend ourselves to a much longer down turn. One Very astute commenter mentioned the Available Buyers are far less than the current inventory. Someone else mentioned demographics which is going to be a much more serious problem later. Price are going down, prices will continue to go down. If the stats are 1 in 10 are in Foreclosure or late, if we can keep 5 of those who can rent or stay in the home in them, this may in time stabilize the Lower Prices. Avoiding a Snowball affect.
My reasoning for lower interest rates is simple: We have massive layoff's all over the Country. Wages haven't gone up in yrs. Jobs have been outsourced that used to be Mom's 2nd job (call centers.) Young people have it Much Harder than we did. It was rather simple if you had a good Education you got a good job. Other jobs were available for the less academically inclined. These people are having a difficult time w/2 degrees. I know I was blessed to be born when I was, more blessed to be able to retire early & relocate before this mess started playing out.
If the Taxpayers can Bail Out the Banks, the Banks must be force to lower real Mortgage Rates on those that can pay. It is only fair. Someone said-Repair your Credit & Move on. I agree if you are 10-20% upsidedown on the property, but you don't bounce back from losing a House for many yrs...
I guess in the end it is a mute point as interest rates are moving lower & the Banks are beginning to realize that REO is Very Expensive to keep on your books & there aren't many buyers...In the end it is a Business & I do hope that the better judgment of the Bankers is in the favor of not creating further destruction. On the other hand there many desirable properties to be taken for a song from Credible Owners who were real Victims of this Crisis.
People w/Bad Credit Can't get Loans and the Business is going back to actually Properly Qualifying Buyers for Loans. If there aren't lower interest rates across the board, there are going to be many more vacant homes. The Wise Folks who have gone into areas inundated may find themselves upsidedown when this crisis continues down another 20% in value. Cheap Rentals is a Great Retirement Plan, but not if the other area homes are Vacant & you got in a little early...TX exploded in '83, some of those homes stood vacant for 5 yrs. Some regained the orginal value of the Loan by the mid '90's. This is National, the scope of which we haven't seen since the '30's. They did try to raise rates in the early 30's right...
Scott, you did write a good article. I just strongly disagree w/the concept.
Owner 1: Has had the Property for many yrs, w/fixed rate loan...Needs to move to another City. Over Supply is Driving Prices Below what the Owner Must get to Rent the House, selling isn't going very well.
Owner 2: Took out an ARM 2 yrs ago which is resetting, they have little/no equity in the home & they can't make the new reset payment.
There are many other types of owners. I use these 2 examples b/c Owner 1 has equity, but can not rent w/o a refi. House will be able to be sold in a yr or two as it is in a really good area. Owner can not make the negative cash flow. This person should be refi'd @ a lower rate as they are an Excellent Credit Risk & the Crisis has been the real problem.
Owner 2, made a dumb loan & bit off more than they can chew but they aren't underwater on the house. To Refi the existing owner @ a lower fixed rate is a good plan right now. Assuming the people really want to stay in the house.
If we allow the Inventory to Explode due to Foreclosure Rates any more than what has to be we lend ourselves to a much longer down turn. One Very astute commenter mentioned the Available Buyers are far less than the current inventory. Someone else mentioned demographics which is going to be a much more serious problem later. Price are going down, prices will continue to go down. If the stats are 1 in 10 are in Foreclosure or late, if we can keep 5 of those who can rent or stay in the home in them, this may in time stabilize the Lower Prices. Avoiding a Snowball affect.
My reasoning for lower interest rates is simple: We have massive layoff's all over the Country. Wages haven't gone up in yrs. Jobs have been outsourced that used to be Mom's 2nd job (call centers.) Young people have it Much Harder than we did. It was rather simple if you had a good Education you got a good job. Other jobs were available for the less academically inclined. These people are having a difficult time w/2 degrees. I know I was blessed to be born when I was, more blessed to be able to retire early & relocate before this mess started playing out.
If the Taxpayers can Bail Out the Banks, the Banks must be force to lower real Mortgage Rates on those that can pay. It is only fair. Someone said-Repair your Credit & Move on. I agree if you are 10-20% upsidedown on the property, but you don't bounce back from losing a House for many yrs...
I guess in the end it is a mute point as interest rates are moving lower & the Banks are beginning to realize that REO is Very Expensive to keep on your books & there aren't many buyers...In the end it is a Business & I do hope that the better judgment of the Bankers is in the favor of not creating further destruction. On the other hand there many desirable properties to be taken for a song from Credible Owners who were real Victims of this Crisis.
People w/Bad Credit Can't get Loans and the Business is going back to actually Properly Qualifying Buyers for Loans. If there aren't lower interest rates across the board, there are going to be many more vacant homes. The Wise Folks who have gone into areas inundated may find themselves upsidedown when this crisis continues down another 20% in value. Cheap Rentals is a Great Retirement Plan, but not if the other area homes are Vacant & you got in a little early...TX exploded in '83, some of those homes stood vacant for 5 yrs. Some regained the orginal value of the Loan by the mid '90's. This is National, the scope of which we haven't seen since the '30's. They did try to raise rates in the early 30's right...
Scott, you did write a good article. I just strongly disagree w/the concept.
I would rather pay a lower price than have a lower interest rate because:
- My downside potential is less if I purchase at a lower price.
- Property taxes are dependent on price, not on interest rate.
If I purchase a home when interest rates are high, I can always refinance when they drop at some point in the future. If I pay too high a price, I am screwed just like the other folks who paid too much and the government that is addicted to high property taxes.
Here is my reasoning:
I have to agree with the writer of this article, because lower prices is the right medicine and that is what is required to have affordable homes and therefore increased home sales and not lower interest rates, and here is why.
The lower rates might lower the monthly payment but I strongly believe that
not just all people are gullible or stupid.Any normal person that is at very least a little responsible financially has to look at the price of the home as well despite of the interest rate. These lower interest rates at the moment are artificial and are not going to last long ,given the steady dollar decline and uncontrolled national deficit and we all know it. A normal mortgage rate has to be at rate of 7% or higher to justify inflation and justify the money lent out from the banks.
So in the long run if interest rates will go up, which they will. So the home pricing will continue to decline and the people that bought these houses at inflated prices now when interest rates were 4.5% will find themselves underwater thus having no equity or very little of it. So most of them may be inclined to foreclose their homes perpetuating housing crisis. Keeping housing prices high will help only those irresponsible home owners that either bought homes at higher prices during the bubble, the speculators or the people that refinanced their homes to death to maintain a false lifestyle. The higher prices will also help the local governments to drain more property tax wile they can. The higher prices are not what is good for the economy and the people that want to buy homes especially first time home buyers. Lower prices are.
Just an opinion.
On Dec 29 12:49 AM HappyRenter wrote:
> I am in the market to purchase a home and have cash to make a 50%
> down payment. When I do the Buy vs. Rent math, it makes no sense
> to purchase at this time. Prices are still too high.
>
> I would rather pay a lower price than have a lower interest rate
> because:
> - My downside potential is less if I purchase at a lower price.<br/>-
> Property taxes are dependent on price, not on interest rate.
>
> If I purchase a home when interest rates are high, I can always refinance
> when they drop at some point in the future. If I pay too high a price,
> I am screwed just like the other folks who paid too much and the
> government that is addicted to high property taxes.
IMO, interest rates should have been moved high enough at the outset of the bubble in 1999 to stop the real estate market evolving from boom into bubble conditions.
In an article in THE AGE (Melbourne) in 2005, I said it was too late for the Reserve Bank of Australia (RBA) to increase interest rates because asset prices were poised to tank and inflation was no immediate threat. The more correct direction in interest rates in Australia at that time was down. But the RBA managed to increase them by 25 basis points on SEVEN occasions over the next three years. Now in a panic, it has decreased the overnight cash rate by 3% in just 3 months!
Who on earth is advising our central banks? Obviously the same gormless economic morons who helped create the residential real estate bubble! They get paid to do this to us? See a fuller analysis on our website.
Figuring that I would make at best 2.5% on my 150K in a cd and my prop taxes of 2900 yr, I am spending $553 a month to live in a 4 year old, 3 bd/3ba house.
I can't rent for less than that. Therefore, I don't understand all this talk about how bad the housing market in the US is these days.
Maybe people need to leave the big cities and move out to the country. Although, I am only 1 hour west of Madison WI, which has one of the best job markets in the US.
Donnie
We need to let the next generation buy affordable housing. They cannot afford a starter house at 350K, and it's not fair to make them rent forever. You also cannot bring back interest only, no down payment, or any other kind of crazy loans.
The housing market, like the tech bubble in the stock market, is not supported by fundamentals (ex: rent comparisons, fair housing prices relative to income etc) and that is why it must go back to 2002/ 2003 levels.
Always remember, look at the PRICE of the house, not the payment because if you have to leave in 5 years, and the PRICE has DECLINED, you will OWE money by just looking at the payment.
I have to agree 100%...whether its real estate or cars we've become a "What's my monthly payment society?"
Can't afford the McMansion on a 30 yr Fixed, find an ARM or Option ARM that can.
Can't afford the Bimmer or Benz on a 4-5 yr auto loan...find me a lease or 8-10 year loan that can.
Who cares about the consequences!! Hopefully that attitude in this country is finally coming to a bitter end. Shame the wealth of us hard working and intelligent folks who always do the right thing had to be destroyed as well along with that of the fools!
On Dec 26 05:56 PM Ricard wrote:
> I think it's been proven over the past 5 years that the gullible
> person is the one that looks only at payment, not price. Else, how
> can you explain option ARMs, or ARMs in general? That is actually
> the problem in America - most are addicted to the monthly payment
> plan, and most are willing to mortgage their future earnings for
> present rewards, damn the cost.
>
> A banker's perspective would be to look at area cap rates, and see
> if they are sustainable. Then, they would compare with their own
> cost of lending. It's all a business at that end, and the economics,
> at least in the bubble zones, are still absolutely horrendous. <br/>
>
> To even suggest that anyone in the housing market would even consider
> ignoring either price or rate is the hallmark of stupidity. Both
> must be considered, and either can make or break a deal. America's
> problem, and indeed most of the world's (in regards to real estate),
> is that they ignored price to their own peril.
No owning a house should not be a huge burden on a family.
Interest rates are nice but in the end if the avg person lives in a house 7 years you better hope that interest rates stay low for a long time so your future buyer can afford the house you want to sell.
Houses are unaffordable based on local incomes across the country. No in all areas but in the major regions of the country with higher housing prices houses are still over priced vs local incomes.
So do not let any realtor just talk about those ponzi mtg rates the price you pay is important so when you have to sell you can find a buyer that can afford it like you.