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Reader Comments: 32 Responses

1. I am looking forward for 9% rates to drive all of the flakes out of this market and make house prices reasonable again.

   Ted | January 28th, 2009 at 7:58 am

2. My first condo was purchased in 1984 because 1) it was in a good location and 2) it had an assumable mortgage- 10.5% for three remaining years and then it jumped to 12.5%. We had to fight with the bank to get them to allow us to assume at the lower rate – at the last minute the bank had slipped in papers that had the loan immediately at the 12.5% rate- The seller threatened to sue the bank and the bank capitulated. I think they thought we wouldn’t read the documents!

   The more things change…the more they stay the same.

   mentalpause | January 28th, 2009 at 8:24 am

3. I’d rather buy at higher rate and lower price.

   george8 | January 28th, 2009 at 8:50 am

4. Question is..what will higher interest rates do to house prices?

   InterestRateHike | January 28th, 2009 at 9:02 am

5. House prices?

   They should reflect the higher rates by selling for less. But every day that goes by, more ‘regular’ sellers are saying to themselves, “I’m not giving it away”.

   We’re already at roughly 50% REO sales, can you see that stat going to 70% or 80% next year? I can, because elective sellers are going to wait, and short sellers are going to figure it out that they’re wasting their time and should just take the free rent for as long as it lasts.

   Jim the Realtor | January 28th, 2009 at 9:42 am

6. More bad news:

   The San Diego Association of Realtors says its membership grew in 2008, probably the most traumatic year in the group’s history. The group now has 10,182 members who are “greatly benefiting from what the association offers,” said CEO Mike Mercurio. In addition, the group donated more than $61,000 to local charities last year.

   Jim the Realtor | January 28th, 2009 at 9:43 am

7. I think the govt is going to do all it can to keep rates low for a long time.They will keep buying treasuries with printed money.If any of you think treasuries yields are going up soon try TBT if you have brass balls.

   arizonadude | January 28th, 2009 at 9:54 am

8. When I was touring a new home development this past weekend, I had a real estate agent tell me that it was better to get in now with a low interest rate than to wait until the end of the year for prices to drop more.

   I tend to disagree for the following reasons:

   1. Lower price = lower taxes since they are a percent of your purchase price
   2. You can write off the increase in mortgage interest due to the higher rate.
   3. You may have other chances within the 30 year mortgage to refinance to a lower rate.
   4. When you sell the house, it will be based on your purchase price and equity in the house, not on the interest rate of your mortgage.
   5. If you become upside down in your house (if housing prices continue to drop), you won’t be able to get a HELOC if you need it. Plus, it may take awhile before prices return to a level above your purchase price, based on recent housing price drop data, which is projected to continue through this year and next.
   6. Better chance of gaining more equity over time with a lower purchase price. (Many real estate investors say, “You make money when you buy the house.”)
   7. Increasing interest rates put downward pressure on prices. So, if interest rates do start to go up, it will only put more pressure on pricing. They are inversely correlated.

   Please let me know your thoughts on this.

   Thanks!

   Blue Streak | January 28th, 2009 at 9:55 am

9. At some point the government is going to have to reel in some of this free money, assuming that banks actually lend at these low rates. I think people who were wise and didn’t panic buy in order to own are waiting for prices to collapse further. These same people aren’t going to buy a crappy house or quick flip because prices have declined and interest rates are low. We need to see better value and fundamentals come back to the market before we see purchases tick up.

   Chris | January 28th, 2009 at 10:06 am

10. I’m sure you’ve seen this, but here it is anyway. The newspapers are a few weeks behind you Jim.

    http://www.nctimes.com/articles/2009/01/27/business/z89562a29e31807fc8825754b005f2c38.txt

    Chris | January 28th, 2009 at 10:14 am

11. I wouldn’t worry about interest rates rising in the short term… just my opinion, but I’ll justify it somewhat. The Fed is already at zero, and talking about buying government backed or issued securities on the open market. It won’t be politically feasible for them to raise rates while the government is still in “stimulus” mode, and since the Democrat stimulus initiatives are nothing more than thinly disguised massive pork spending programs which will have no more effect at stimulating the actual economy than any of the other massive government waste, I expect we’ll be in “stimulus” mode for the entire Obama first term, at least. As a bonus, it provides a great excuse for ongoing pork spending at a massive scale, and you can blame the ongoing economic troubles on previous administrations for a while.

    As an analogy (which is not a 100% parallel, but close enough for comparison), look at 1990′s Japan. They did the same thing when their housing market collapsed, and effectively stretched a one-year necessary market correction into a 15+ year economic disaster and virtual market shutdown. I expect nothing less from our government, but in our case we’ll also have massive deficits, ridiculous out-of-control spending, phony “stimulus” plans for massive pork projects, and lots of finger pointing.

    Housing prices will keep going down, certainly, until they get to the natural market bottom, however long it takes (it would take roughly a year without government interference, I’m guessing our government will extend our mess to at least 5 years, probably more). Interest rates, though, will probably stay low the entire time, as the government misguidedly tries to “revive” lending during the process, turning a short but painful correction into a full-blown decade+ depression.

    Nick | January 28th, 2009 at 10:17 am

12. Hi Blue Streak,

    here’s another way to look at it. You’ve detailed many reasons why it is more valuable to you to buy at a higher interest rate than a lower, all other things being equal (i.e., the house price drops so that the monthly payment is the same in either case). But what that really means is that, as a perfectly rational consumer, you’d be willing to pay a slightly higher price at a higher interest rate than would be suggested strictly by the “purchasing power” argument that Jim already calculated out for us. If that holds true for everyone, then the house price at higher interest rates will get bid up a little bit (relative to the pure purchasing power number). In a perfectly equilibrated, rational market, it will then be exactly the same net cost, taking all the tax implications and other factors into account, whether you buy at high or low interest rates.

    Now there are two things that could modify this for you, a particular individual as opposed to some “average” buyer.

    1) Your interest rate deductions and all the other tax implications will depend on your tax situation and how much you borrow vs. putting down. So, for example, an all-cash buyer would actually prefer low interest rates by this argument; they don’t get the mortgage interest tax deduction, so the extra amount a house is bid up under high interest rate scenarios is just extra cost to them without the corresponding tax writeoff.

    2) This bubble has proven over and over that people act very irrationally with housing prices, and the market is actually very slow to come to equilibrium. So housing prices always seem to be lagging reality.

    So IMHO the actual answer is complicated and depends on your tax situation. If the market equilibrated instantly, then housing prices would drop accordingly as interest rates went up, and the argument your real estate agent made would be B.S. But there is stickyness in house prices, so they would probably not drop as quickly as they should if rates went up.

    Just IMHO, but what I’d suggest is just to see if you can find a house you really, really love. It’s surprisingly hard to do. If you can do that, these sort of n-th degree of precision arguments about interest rate changes and so forth become largely irrelevant.

    Dwip | January 28th, 2009 at 10:22 am

13. @Nick, you speak the truth my friend!

    If the Fed (who pretends to be part of our government) were taken out of the interest rate setting business, and the market were allowed to do what markets do and set its own rates, we could be out of this in a relatively short time. Unfortunately, that will never happen.

    Stephen Waits | January 28th, 2009 at 10:31 am

14. The secret is to fix if you buy. The tell is the spread twixt FFR and Prime Mortgage rates. Already cranked up to the highest gap in history. That means there is no down left.

    I haven’t talked about it but this post causes me to consider what is coming. I expect a two tier set of rate sheets. The best conformers are going to see 9-10% and a lot of the rest will be expected to bear 13-14%. Put that 14% into Jim’s excellent spectrum.

    $200,000 @ 14.00% = $2,369.74 (55% reduction)

    Ouch.

    Rob Dawg | January 28th, 2009 at 10:50 am

15. Buying forclosures today you will not get your taxes at sales price but they will use prior assessed value.Or what they deem is market value,you have to petition for lower taxes under prop 8 and find comps that are not foreclosures!

    Paid off homeowner | January 28th, 2009 at 10:53 am

16. According to these charts we have about another 10-20% to go before things reach historical norms.

    http://static.seekingalpha.com/uploads/2009/1/22/saupload_09_01_21c_existing_home_prices_and_income.png

    http://static.seekingalpha.com/uploads/2009/1/22/saupload_09_01_21c_price_income_ratio_and_mtg_rates.png

    If interest rates eventually go through the roof (guaranteed at this point), you could see another 10-20% drop from there.

    no bubble here | January 28th, 2009 at 10:56 am

17. I remember when 9% was a good rate. Many years ago when we bought our first house, the going rate was 12%. I don’t remember being shocked about that. Seemed normal to us.

    KC | January 28th, 2009 at 11:41 am

18. #15- huh? Never heard of this. Citation please.

    Ted | January 28th, 2009 at 11:55 am

19. Don’t forget you can always get your property taxes lowered when the market drops and you have reasonable comps top back up your “market valuation”.

    Recent Buyer | January 28th, 2009 at 11:59 am

20. What if CA goes bankrupt? It seems inevitable…

    Sims | January 28th, 2009 at 12:17 pm

21. In my nice little city of 70k we have about 1100 Realtors, less than 200 had a transaction in 2008. They cant all be retirees??

    Sims | January 28th, 2009 at 12:21 pm

22. Considering that interest rates will continue to fall for months, that example is why you should *not* buy today. But great explanation!

    BDiego | January 28th, 2009 at 12:34 pm

23. Real estate licenses in California are good for 4 years I believe, and they are absurdly easy to get & therefore easy to set aside.

    I suspect there are a lot of people with them, who aren’t using them so take those numbers with a grain of salt.

    My wife’s license expired not long ago. She sold 1 home years ago, and then moved on to a different career.

    What would be interesting is if there was a way to find “active” licenses – those with a sale in the last X amount of time.

    sdnerd | January 28th, 2009 at 12:58 pm

24. The 10,182 members of SDAR are at least dues-paying agents, so they are slightly more active than those who just have a license.

    There is also the North SD County Association of Realtors for those above the SD city limits, and we have another 5,000 members.

    There were 28,765 detached and attached sales in 2008, or 1.89 sales per agent. I’d guess that at least half had no sales last year, and are wondering about paying their dues again this year.

    Jim the Realtor | January 28th, 2009 at 1:28 pm

25. And don’t forget if you have an active RE license, you can’t collect unemployment. So the “inactive” yet valid licenses do help us in one way. There is also the PSAR (Pacific Southwest Assoc of Realtors) for the South county. Not sure how many enrolled.

    Just a Broker | January 28th, 2009 at 2:17 pm

26. Assumable mortgage? Did someone just say assumable mortgage?

    Wow, that’s a term I haven’t heard in years …

    AK | January 28th, 2009 at 2:19 pm

27. Dwip,

    I’m trying to understand your argument. Why would buyers bid up prices if rates are high vs. when rates are low?

    Barring interventionist behavior by the Fed and govt, when rates are high, there is less/more expensive money to lend and terms tend to be more stringent. There are generally fewer buyers to compete with when rates are high, and these buyers are truly qualified. You will not be competing with 100%+ LTV fools with their neg-am teaser rates and 500 FICO scores — which is what drove this bubble in the first place.

    Also, we reached the affordability limits during the peak, based on monthly payments. IOW, people could not afford to take on greater monthly payments, and this was when people were using ultra-low teaser rates to qualify. Based on that alone, higher rates would have a direct inverse relationship with prices, exactly like Blue Streak stated.

    Cash buyers would always prefer lower prices/higher rates over higher prices/lower rates…always.

    BTW, nice post, Blue Streak. Agree with all your points.

    CA renter | January 28th, 2009 at 2:37 pm

28. Hiya CA,

    Prices at high interest rates aren’t bid up in absolute terms, they are bid up relative to what is suggested simply by the purchasing power argument.

    For example, let’s say you’re putting 20% down, and using the numbers Jim calculated for us (house payment of $2370/mo). The purchasing power argument would say:

    If interest rates are 5.5%, house price should be: $521k.

    If interest rates are 9.5%, house price should be: $353k.

    My point is that actually, in an ideal market, the price when interest rates are 9.5% will be higher than $353k, for all the reasons Blue Streak mentioned.

    For example, with 5.5% interest, the total interest payments over the year are $22,794. With 9.5% interest, the total interest payments over the year are $26,715. You are paying $3920/year more interest at 9.5% than at 5.5%, even with the same monthly payment. Mortgage interest is deductible on your taxes, so you have a bigger tax deduction for the 9.5% case than for the 5.5% case. That means you should be willing to pay more than $353k if interest rates go to 9.5%. Same for the other factors Blue Streak mentioned; since they are all valuable, they mean that prices should be bid up from the $353k.

    Bottom line, if the housing market were perfectly equilibrated, the “average buyer” with a given, fixed monthly payment would get the exact same house whether interest rates were low or high. Departures from this behavior only occur because the housing market has sticky prices (which we know is true), and because your own tax situation may not be “average”.

    Dwip | January 28th, 2009 at 6:59 pm

29. Thanks for your response, Dwip!

    Okay, I think you’re referring to the buyer taking a greater deduction into consideration. That’s certainly possible, but I would think that the smaller pool of buyers/less competition would wash this out a bit.

    Yes, there are definitely different variables that apply to different buyers.

    We just want LOWER PRICES!!!

    CA renter | January 28th, 2009 at 10:36 pm

30. Thank you Dwip for fine contributions, well said.

    I especially liked:

    but what I’d suggest is just to see if you can find a house you really, really love. It’s surprisingly hard to do

    The difficulty in finding a great house causes the logical decision-making to fly out the window once you do find one. That’s where it helps to have an experienced agent to assist with keeping your feet on the ground.

    Jim the Realtor | January 28th, 2009 at 11:17 pm

31. Thanks for all your comments.

    I have actually found many houses that I’m interested in. The middle to upper tier priced homes are slow moving and there are lots of homes waiting for offers.

    I think the argument that Dwip makes really applies more to an individual, but it isn’t based on the market as a whole. On average, there is only so much of a monthly payment the average person can afford. I believe there are different tiers to this and geographic influences based on types of jobs for that region. For example, the average income earner in San Diego would be higher than someone in Yuma, etc. This, as we know, will have an affect on overall purchasing power, on average, in that microeconomy.

    There may not be a 1 to 1 correlation on increasing interest rates to decreases in home prices, but increasing interest rates will put downward pressure on pricing on average. I think like you said Dwip, based on interest tax benefits, certain price tiers will be “sticker” than others.

    I still believe prices will continue to go down over the next year to 2 years in San Diego, and the massive amount of layoffs and unemployment aren’t helping and will make matters worse. It will take several years before those jobs return to the market. Unemployment in California will go above 10%, possibly before year end 2009.

    My Mom used to sell cars back in the day, and most people would say to her “what be my monthly”…. I believe, on average, this holds true for housing, especially if you are financing the house vs. paying all cash.

    Again, thanks for your comments. I’m sitting tight and waiting for prices to drop more over the next year to 2 years.

    I’m kind of in OC renters situation. Just waiting on the sidelines. He just bought, but I’m holding off longer. I’m seeing new, 4,000 + sq. ft. homes dropping down to the $160 to $180 sq. ft. range. These aren’t in the most desirable areas, like NE Chula Vista, San Marcos, Santee Sky Ranch, etc., yet they are getting hit hard on prices. I even see more pressure on new housing in Rancho Bernardo and Scripps Ranch, i.e. 4S Ranch, The Lakes, & Stonebridge.

    Thanks again for your posts on this.

    Blue Streak | January 29th, 2009 at 9:35 am

32. Guess on Seafaire

    I think the noise will be abig factor in the price. Guess sales price will be $537,545.

    But you never know with your persuasive ability!

    John

    John Ford | February 5th, 2009 at 4:20 pm