Will increased mortgage rates further depress prices?
Started by towerofshred
over 17 years ago
Posts: 11
Member since: Apr 2009
Discussion about
I am not an economist, but my analysis goes like this.... Real estate values are based on what people can pay (and supply & demand). Most buyers have to borrow to buy homes (notwithstanding cash buyers). So for most buyers, affordability is determined by carrying costs, be it mortgage plus maintenace or mortgage plus tax and cc. Right now, we have historical low mortgage rates so carrying... [more]
I am not an economist, but my analysis goes like this....
Real estate values are based on what people can pay (and supply & demand). Most buyers have to borrow to buy homes (notwithstanding cash buyers). So for most buyers, affordability is determined by carrying costs, be it mortgage plus maintenace or mortgage plus tax and cc.
Right now, we have historical low mortgage rates so carrying costs are lower and prices are still falling. As interest rates rise from these lows, won't prices have to drop for carrying costs to stay static? This is assuming that these low rates are unsustainable, which I think it has to be.
If this is correct, maybe prices will return to 1990s pricing but with relatively high mortgage rates. I guess the good thing will be lower downpayments and tax basis, and higher mortgage interest deductions.
So in the end, we should buy when rates are higher rather than conventional wisdom that states it's better to buy when rates are low.
Do you think my analysis is correct?
[less]
Response by jifjif
over 17 years ago
Posts: 232
Member since: Sep 2007
Isnt current mortgage artificially created through government intervention?
Theoritically you are right about high rate results in lower prices but as you can see, low rates does not impact the price increase. If there was no artificial intervention, the rate would be higher.
Ignored comment.
Unhide
Response by Riversider
over 17 years ago
Posts: 13573
Member since: Apr 2009
Our government has decided to manipulate mortgage rates. They'll be low for the immediate future.
Ignored comment.
Unhide
Response by towerofshred
over 17 years ago
Posts: 11
Member since: Apr 2009
Jif, I would argue that the artificially low rates have propped prices up and prevented a sharper decline, as opposed to a price increase. Remember that the price buildup was caused by low rates and easy mortgages. We still have low rates but no easy mortgages. When the low rates go away, the demand that it creates will go away also.
Ignored comment.
Unhide
Response by jifjif
over 17 years ago
Posts: 232
Member since: Sep 2007
Indeed. Any sharper decline would have caused more panic, creating further downward spiral. The market is leveling off to a degree due to this artificiality. This is a sign that this effort by the govt is working.
I am basing this information on delinquency rate from last 3 months. Current results indicate that 30D and 90D along with foreclosure are steady (0.01 decline in foreclosure).
I do agree that when the rate starts to increase, the demand will go away but ideally by that time the market would have stabilized meaning prices wouldnt fall as much. There would be, I think a slightly rally in RE market resulting in rate increase and leveling out per reaction. In US 50% of sales are based on foreclosures with 51% new buyers (even if the sale is depreciating).
Ignored comment.
Unhide
Response by ipod
over 17 years ago
Posts: 18
Member since: Apr 2008
I would say income and monthlies go hand in hand. If income remains constant and mortgage rates and/or coop fees increase (and are expected to rise in the future) the value of the apt must decline below the "current market" price over time. In general, the purpose of the low interest rates is to stimulate consumption, but one must pay for this consumption at some point and that is in depressed future value (again if income doesn't grow to support this price). That said if you find something cheap (a price reasonably well below the normal long term price trend) you will benefit greatly from buying in an artificially low environment. I think the key question revolves around expectations of after-tax income growth.
Ignored comment.
Unhide
Response by towerofshred
over 17 years ago
Posts: 11
Member since: Apr 2009
My argument is that unless you have a jump on the market in terms of taking advantage of low interest rates, an affordability premium has attached to the value of home prices. To have taken advantage in our current cycle that was circa 2002. Now with prices falling and the prospect (short to medium term) of rising rates, values have to fall further. As to the ipod's point of income growth, NY's pattern was for an economic recovery to lag a couple of years behind the rest of the country. Meaning that income growth in NY would probably occur well after rates rise. So I guess if you combine our analysis, value will eventually stabilize until rates rise. If incomes don't rise, values will at that point go through another decline.
Am I trying to say that you should not buy a home now as an investment. Buy a home, but understand that it will probably lose its value over the next 5 years. How long did it take for the NY market to recover after the crash in the early 90s?
Isnt current mortgage artificially created through government intervention?
Theoritically you are right about high rate results in lower prices but as you can see, low rates does not impact the price increase. If there was no artificial intervention, the rate would be higher.
Our government has decided to manipulate mortgage rates. They'll be low for the immediate future.
Jif, I would argue that the artificially low rates have propped prices up and prevented a sharper decline, as opposed to a price increase. Remember that the price buildup was caused by low rates and easy mortgages. We still have low rates but no easy mortgages. When the low rates go away, the demand that it creates will go away also.
Indeed. Any sharper decline would have caused more panic, creating further downward spiral. The market is leveling off to a degree due to this artificiality. This is a sign that this effort by the govt is working.
I am basing this information on delinquency rate from last 3 months. Current results indicate that 30D and 90D along with foreclosure are steady (0.01 decline in foreclosure).
I do agree that when the rate starts to increase, the demand will go away but ideally by that time the market would have stabilized meaning prices wouldnt fall as much. There would be, I think a slightly rally in RE market resulting in rate increase and leveling out per reaction. In US 50% of sales are based on foreclosures with 51% new buyers (even if the sale is depreciating).
I would say income and monthlies go hand in hand. If income remains constant and mortgage rates and/or coop fees increase (and are expected to rise in the future) the value of the apt must decline below the "current market" price over time. In general, the purpose of the low interest rates is to stimulate consumption, but one must pay for this consumption at some point and that is in depressed future value (again if income doesn't grow to support this price). That said if you find something cheap (a price reasonably well below the normal long term price trend) you will benefit greatly from buying in an artificially low environment. I think the key question revolves around expectations of after-tax income growth.
My argument is that unless you have a jump on the market in terms of taking advantage of low interest rates, an affordability premium has attached to the value of home prices. To have taken advantage in our current cycle that was circa 2002. Now with prices falling and the prospect (short to medium term) of rising rates, values have to fall further. As to the ipod's point of income growth, NY's pattern was for an economic recovery to lag a couple of years behind the rest of the country. Meaning that income growth in NY would probably occur well after rates rise. So I guess if you combine our analysis, value will eventually stabilize until rates rise. If incomes don't rise, values will at that point go through another decline.
Am I trying to say that you should not buy a home now as an investment. Buy a home, but understand that it will probably lose its value over the next 5 years. How long did it take for the NY market to recover after the crash in the early 90s?
jifjif,
There is some seasonality to your numbers.
http://www.housingwire.com/2009/04/29/lender-processing-services-releases-april-stats/