Mozart has staked his reputation on North SD County Coastal home prices going up 10% in two years.
If there were rumblings of increased pricing, would buyers get off the fence?
Yes, I think they would, but being off the fence and actively looking for a home, is different than buying. Can you imagine the environment? If the media started bottom-talking, there would be MORE over-priced turkeys than today because sellers would be quick to tack on an extra 5-10% on top of their already-inflated sense of what their house is worth.
Here’s an example of how San Diego sellers reacted lately – note how quickly the list pricing goes up:
Rising mortgage rates might cause prices to come down, making the wait worth it for buyers. But they’d have to go way up to tank the market – probably above 6% and closer to 7% – and Helicopter Ben has said that he has more tricks up his sleeve. Because sellers would be slow to react to higher rates, and most would probably just cancel and wait, there would be a limited number of sales at drastically-reduced prices.
How much would sellers have to come down to compensate for rising rates?
For illustration, here are the loan amounts that have roughly a $2,684 per month payment, P&I:
5% = $500,000
6% = $446,000
7% = $405,000
8% = $366,000
If rates went to 7%, how many sellers would cut $95,000 off their price to compensate?
Those that did probably wouldn’t be selling premium properties, they’d be giving away their junk.
Prices around NSDCC have been fairly stable the last two years, what else besides higher rates might cause them to drop? Natural disasters, wars, terrorist attacks, country going bankrupt, and other major negative events would cause sellers to cancel their listing, not dump. About the only thing imaginable would be banks ramping up the foreclosure machine and then giving them away on the open market – and we’ve seen lately how adept they are at kicking the can down the road.
Things that could help improve the market (but all look very unlikely): Better unemployment, tax revolution, creative financing, additional well-priced inventory, etc.
An improving market might cause buyers to heighten their efforts, but in the end, almost all will be patient until they find the right house, at the right price.
How would eliminating the mortgage interest deduction affect home pricing?
My biggest fear is the country going bankrupt. We will have OVER $20 Trillion in debt within five years. 3% interest rates will cost us over $600 Billion in interest payments per year, that’s over 25% of US annual income, that’s UNSUSTAINABLE and the debt market will NOT be kind to this country. Just imagine if interest rates move above the 3% example, very scary.
It sure sounds like a game-changer, GameAgent, but they would water it down. The NAR would steal more money from realtors to ensure it was soft.
MID is capped at $1,000,000; if they just lowered the cap to $750,000 or $500,000 and phased it in over 3-5 years, it would look like a compromise.
But it would have to be combined with other reforms, or hopefully a whole new tax system, wouldn’t it?
Agreed on the USABK – there has to be some modified-default package coming down the pike. Default on $5T, and pay off the rest over ten years?
If new people get into office and can blame it on somebody else, they’d have a chance at getting away with it.
The National Association of Realtors strongly opposes eliminating the mortgage interest deduction, claiming, “Housing is the engine that drives the economy, and to even mention reducing the tax benefits of homeownership could endanger property values. Home prices, particularly in high cost areas, could decline 15 percent if recommendations to convert the mortgage interest deduction to a tax credit are implemented.”
I’ve been researching the MID this week because of all the debt reduction talk coming from Washington. Many of the current debt reduction options on the table include some form of MID reduction. Add an increase in interest rates and home valuations will change.
Personally, I think the MID should be untouchable. Lots of people (myself included) purchased homes based on a tax-deductible mortgage.
My guess is that if any mortgage interest deduction is implemented, it would not be totally eliminated, and would probably only affect higher income taxpayers. Most likely the current $1 million limit would be reduced, or perhaps taxpayers with income over a certain amount would only be able to deduct a certain percentage of their mortgage interest.
If prices drop too far (because of interest rates or another reason), you are going to run out of equity sellers. For example, if you bought in 2000 (when interest rates were 7-8%) by the time you figure the 8-10% it costs to sell you will be lucky to walk away with anything because prices are already down to 2001-2002 levels (and that is with interest rates at 4-5%).
Sure the banks will unload at any price the buyers are willing and can afford to pay but what happens when the weak hands get worked through the system and the strong hands have already locked in a low monthly payment? Who is going to give up the low monthly payment to buy a bigger house in a higher interest rate environment? Is another 20-30% drop in prices going to heavily motivate the builders to build out on what little land there is left in the prime coastal locations?
5.The National Association of Realtors
ARE A BAD JOKE.
Anyone basing a major financial commitment relying on the NAR is STUPID and deserves to be worked over, hard. Remember
THIS LISTING IS SPCIAL SUZANNE RESEARCHED IT.
Wow, did you see that garage?
Cancellations up:
“A variety of issues are weighing on the market including an unusual spike in contract cancellations in the past month,” said Lawrence Yun, the chief economist at NAR.
Yun said the reason behind the spike was unclear, but he pointed to tight credit and low appraisal prices as possible culprits.
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Congress toying around with the mortgage interest deduction might have put some prospective buyers on the sidelines as well.
This is further bad news if you are trying to sell your house as buyers are going to want another 10-20% price drop to compensate for the MID going away risk.
Nice one congress. For an encore we can have the throw housing under the bus and drive back and forth over it a few times bill.
The thing with interest rates is they tend to be a reflection of inflation. So, the 10% price dump for every 1% of interest increase wouldn’t be a factor because in all likelihood wages would be going up as well as part of an “overheated economy”.
It’s ironic that letting the Bush tax cuts expire is seen by Republicans as a tax increase. But, changes or elimination of the MID, because it impacts the coasts, is somehow OK.
“The thing with interest rates is they tend to be a reflection of inflation. So, the 10% price dump for every 1% of interest increase wouldn’t be a factor because in all likelihood wages would be going up as well as part of an “overheated economy”.”
Tell that to Greece, Ireland, Portugal, Spain and Italy. Greece would be thrilled if the current implied interest rate of 40% on a 2 year was because of an overheated economy with high inflation, unfortunately it’s not. It’s at 40% implied because investors know they cannot pay back the debt and they are going to default. The US isn’t there yet but there’s going to come a point where investors are going to realize that we aren’t going to pay them back either. Interest rates can and will rise without an over heating economy and/or inflation. It happens also when you reach you’re borrowing capacity which tends to be 1-3 times GDP.
The MID should go away entirely.
Most people can’t even take it because itemization doesn’t even rise to the level of their standard deduction.
The MID is simply a prop for expensive housing markets. Good riddance.
Ok, so we are the same as the PIGS, (Portugal, Ireland, Greece and Spain). Do you really believe that?
This isn’t very scientific but here’s a quick Google effort using everyone’s favorite era, 1976-1987. I’ve put the year, inflation and approximate interest rates.
Year = Inflation/Interest
1976 = 5.75%/5%
1977 = 6.50%/6%
1978 = 7.62%/7%
1979 = 11.22%/10%
1980 = 13.58%/14%
1981 = 10.35%/17%
1982 = 6.16%/15%
1983 = 3.22%/8.5%
1984 = 4.30%/9%
1985 = 3.55%/8%
1986 = 1.91%/7.5%
1987 = 3.66%/6%
@aljanet
The US govt already has over $50T of debt if you include entitlement obligations. No thanks to Bush who’s Medicare Part D added $8T.
http://www.pgpf.org/
On the MID, Congress is unlikely to make and sudden changes due to effects on the housing market, house prices, and the resulting tax revenue they bring. More likely is that at the higher end incomes, the MID will only allow a max 28% tax deduction vs the standard income tax rates.
“Ok, so we are the same as the PIGS, (Portugal, Ireland, Greece and Spain). Do you really believe that?”
As of right now no, but certainly if the trajectory of debt continues we will be at some point. It might be 5 years or 10 years away, but it’s bound to happen because nobody will be willing to actually cut or tax their way out of this situation. If you’ve got a $100K debt and a $30K income you could probably sacrifice to the bone and get a second job to pay it off, but nobody wants to, they’d rather just live a decent life until they have to default. That’s what our government is planning on doing on a much larger scale.
I suppose a hyper inflationary collapse of currency could happen also but in that scenario nobody would be able to buy a home anyways because their savings would be worthless. I can envision a higher nominal home price depending on what happens, I could even envision higher real prices in some very regional markets (maybe NCC is one of them), but I still think there’s too much debt in the system to see a truly prosperous outcome for housing in general for the next 3-5 years. I could be wrong, but I have serious doubts, unless somebody can tell me how the debt problems resolve themselves.
Jim,
How much is MID a factor for the high end houses of NCC?
Aren’t most people who buy $1M+ houses affected (ie by losing their MID) by the AMT already?
Wages have been stagnant for quite awhile, until they go up I don’t see home prices going up much at all. And if mortgage interest rates go up, I believe it will put downward pressure on home prices, as people still need to qualify based on the monthly payment they can afford. My radical guess is that home prices will be about the same 10 years from now here in San Diego. Further, I still don’t think we’ve seen the bottom. People look at 2005 home prices and believe that their homes were really worth those inflated prices, and now therefore believe that today’s home prices are undervalued. There are tens of thousands of people here in San Diego who are just waiting for home prices to go back up to their “proper value” so that they can sell their home. So even if home prices started rising, supply would then flood the market, preventing home prices from increasing.
@livinincali
This is how they will deal with the debt problem: http://en.wikipedia.org/wiki/Financial_repression
Of course that implies that they will figure out how to stop spending more than they make which is a big assumption.
Interesting concept on Financial Repression. Of course it only works if you’re willing to stop spending more than you make which in America is completely unpalatable because we borrow about 40% of every dollar we spend. We have to cut 500 billion to 1 trillion dollar in spending each year and increase taxes by a couple hundred billion to even get close to a balanced budget before Financial Repression would work. I assume that’s the path we go down once we default though. They do seem to be able to run real negative interest rates right now. We just haven’t cut the spending.
Troubled, you could have made that identical argument and prediction in the year 1995.
I think in few years when our debt problems really become ugly, the only safe place to put your money will be in real estate. I would have agreed with Troubled Loner that house prices will be the same 10 years from now but with our debt problems, I think people will risk it all and get into real estate.
aljanet,
Ah fear… if we only worked to have people understand economics (and science), rather than have our politicians work to embed fear in the mind of their constituents.
With the highest income differential, and lowest taxes in the industrial world, the people in power have convinced the lower income people that the taxes are too high.
And again the Republicans have seen the light, after creating deficit spending… they want to stop deficit spending. All political, playing on the fears of the economically ignorant.
“Ah fear… if we only worked to have people understand economics (and science), rather than have our politicians work to embed fear in the mind of their constituents.”
It would certainly help if people had a better science, math, and economic understanding. The reality is in the quest for cheaper prices we’ve forced the consolidation of business such that the rich effectively have to get richer. Take the tens of thousands of stores that provided shop owners with a decent middle class to upper middle class income and replace it with Walmart, so a couple hundred senior managers can make the money that thousands of shop owners made before.
Our decisions as consumers and investors are the reason that the rich keep getting richer.
No doubt we can try the tax the rich route, effectively stealing their profits from our purchases but they have a tendency of passing those costs along to the consumer.
I think of the US like this right now. Borrow money from Walmart. Tell Walmart our kids and grand kids will pay them back. Give that money to the poor so they can buy more stuff from Wallmart. Walmart makes profit from the interest on the bonds and from sale of the goods from the money we give to the poor.
“Walmart makes profit from the interest on the bonds and from sale of the goods from the money we give to the poor”
My concern is what happens when we can’t pay the interest on the bonds and there is no more money to give the poor to buy those goods?