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Bottom's up

I know St. Patrick's Day was last week but action by the Fed didn't bring down mortgage rates until after they finished drinking some green beer and getting even more serious about stabilizing the housing market by announcing that they would buy long term treasuries and mortgage backed securities.

Sure, some buyers are sitting on the fence preferring to wait for the bottom instead of buying now and that's very understandable. But once economy starts to turn positive and the bottom in housing has been reached, what do you think will happen to interest rates.

If you guessed that interest rates will be higher, I would strongly agree with you. 

And what happens to the cost of buying a home when higher interest rates are higher.

If you guessed that it would be more expensive, I would strongly agree with you.

And I'm not suggesting  that home prices will immediately begin to appreciate sharply at that point, rather it is the relationship with monthly payments and mortgage rates that will make the purchase of a home more expensive.

Here's what I mean:

Charleston real estate, mortgage rates and home prices 

Today's mortgage rates for the most qualified borrower's are not just low but an amazingly low 4.5%. Almost everyone would have been happy to have a mortgage rate between 5.5% and 6% in the "old days". But times are different and look at what your monthly payment will be for a median priced home in the Charleston real estate market with a 30 year fixed mortgage rate of 4.5%.

Now if rates went up to 5%, 5.5% or 6%, look at how much more expensive it would be to buy a home. Or you can look at it another way, if you happen to be afraid that prices might decline after you buy, you are getting that house for a discount from what you would pay if you waited until the bottom and rates went up. And, because it is such a strong buyer's market today and you aren't competing with lots of other buyers and there are so many motivated sellers, you can make a more aggressive offer today than you likely will be able to make once the market begins to turn positive.

Bottom line: bottom's up.

Published Tuesday, March 24, 2009 7:30 AM by Howard Arnoff

Comments

# re: Bottom's up

....When the "bottom" comes, it is usually a bounce...with an increase of both price AND interest rates.  Howard, you are correct.  If I was in the market, I would be writing offers this week.

Tuesday, March 24, 2009 8:29 AM by Charlie

# re: Bottom's up

Then Charlie, we need to get you into the market right now and write a contract ;)

I was just totally amazed at the impact of mortgage rates on affordability and how it cushions a buyer from potential further price declines because if you wait for "the bottom" to be in place, you likely pay more for the home and have a higher monthly payment due to higher mortgage rates.

As to the bottom, my thinking is that until inventory is reduced, we aren't that close to it. But our prices haven't gone down that much because as best as I can tell, the "action" in housing has been at the lower end of the market. That just makes it "seem" like prices are dropping according to the statistical computations.

But there is some good news coming on the jumbo mortgage front from BofA that will help resales of higher priced properties and get the "move up" buyer back into the picture.

Tuesday, March 24, 2009 9:31 AM by Howard Arnoff

# re: Bottom's up

One thing to think about is I would think house prices in general should really float around a level of affordability versus incomes in an area.  I remember when my parents bought a house in 1982 their interest rate was 14%.  As interest rates went down they refinanced obviously but if you looked at what houses were selling for in the area the monthly costs basically stayed the same.  So I am concerned that if interest rates go up we will find ourselves in a situation where prices have to come down to meet to keep the monthly costs at roughly the same levels.

Tuesday, March 24, 2009 11:00 AM by alex

# re: Bottom's up

Alex, thanks for stopping by and you make a good point.

Except for one thing, Charleston has a large number of secondary (and third and fourth) home owners. Prices of those homes don't have anything to do with number one, reality and number two, local income.

But back to your point.  

I've owned a number of homes in my life at various interest rates. Maybe I'm different but I always bought within my means. If I wanted a larger or nicer home than I could afford, I either had to earn more money or stay within my personal level of affordability. The past few years demonstrated that many people did anything but that.

But I think the real reason that homes have historically gone up over time is that ultimately, a house may be the best hedge against inflation. And I do think that once this economic mess has been cleared up, we will be paying for it with higher inflation due to current massive government spending.

So yes, higher mortgage rates, higher home prices and hopefully, higher incomes.

Tuesday, March 24, 2009 12:05 PM by Howard Arnoff

# re: Bottom's up

But what happens when interest rates invariably go back up? Won't the prices will come down! UNless of course, incomes rise in relation to interest rates and inflation. How often has that happened in the last 100 years?

Unless the fed and government intend on keeping interest artificially low forever this could very possibly lead to another BUBBLE.

I don't understand why they can't grasp the fact that prices in relation to fundamentals are what drives the market. Not something as variable as interest rates.

This is like putting a piece of gum on a leak in the hoover dam. A great temp fix but the thought of what might happen in 4-5 years if interest rates go back to historical norms is frightening.

I guess the days of letting the market of supply and demand dictate the price is gone. Hello socialism.

The long term view on these interest rates going down again is horrific. Atleast on new purchases...looks great for my refi though!

Interesting times indeed.

Tuesday, March 24, 2009 3:13 PM by js

# re: Bottom's up

JS, excellent points. Actually, incomes have always gone up until the last 10 years when global economies of scale began to work against America.

Of course, the rich got richer, the poor got poorer and the middle class simply refinanced and took money out of their home.

Housing is a larger part of our economy than most people might think, new construction adds a lot of jobs. In post WWII America, if what was good for GM was good for the country, today, well, today, GM is toast; what's good for housing is good for America.

So housing has to lead us out of this mess and Ben wants everyone to either buy a house or at the very least, refinance and spend the difference between your old payment and your new payment. Consumer spending accounts for a large part of the economy.

And I read somewhere that we will now depend on bubbles for our future economy. I guess we just have to figure out what it is and get out in front of it.

And once you recognize a bubble forming, know when to get in but more importantly, when to get out. As an example, we had an oil bubble this past year to $147 and back to under $40. Now it's up a little over $50 as consumers have already *forgotten* $4 gas and are buying trucks and suv's again.

Tuesday, March 24, 2009 3:55 PM by Howard Arnoff

# re: Bottom's up

Interest rates typically move up to "cool off" an overheating economy.  That wont be a problem for several years.

Tuesday, March 24, 2009 7:19 PM by Charlie

# re: Bottom's up

Charlie, actually I think the economy will pick up sooner than you think but don't count on the economists to tell you until a year later.

Wednesday, March 25, 2009 4:31 AM by Howard Arnoff

# re: Bottom's up

I agree that the broad economy will improve 1Q10.  There are many "malinvestments" that will can several years to work off, some in real estate but not here.  These mal- investments will be a drag on growth for sometime.  

Wednesday, March 25, 2009 10:08 AM by Charlie
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