Rich T. noted that in the past there hasn’t been a significant relationship between rates and pricing:
There’s actually very little correlation between interest rates and home valuations, and if anything, homes have tended to get more expensive in rising rate environments (due to rising rates typically being accompanied by rising wages, as well as other external factors). However, I think that a sufficiently steep and abrupt rate rise could really hurt home prices.
But recall that I am more concerned with minimizing monthly payments than the purchase price. If rates rose enough to really impact prices, it’s likely that those higher rates would have affected monthly payments even more. So for a long-term, heavily leveraged purchase, the threat of rising rates is a reason to act sooner rather than later.
tj & the bear agrees, saying that this time it is different:
J6P now has no useful equity, which means any purchase has to be financed in it’s entirety. That puts pricing directly tied to income via the payment, which in turn is determined by rates. IMHO any significant rise in rates will have just as dramatic an effect pushing prices downward as the original drop in rates did in pushing prices skyward.
The FedGov has thwarted previous bear campaigns with the various can-kicking devices in support of big banking, would they let interest rates get away from them?
Last week the Fed stated that they plan to keep rates low through the end of 2014.
If something went crazy and mortgage rates did start rising, they would have to go up more than 1% to alarm home buyers. Purchases of homes at an effective rate of 50% off with inflation will still be attractive.
But let’s imagine that rates did hit 5% or higher – what would sellers do?
Let’s examine who is selling today. Short sales and REO listings only comprise 10% of today’s NSDCC detached inventory for sale. The rest are probably split between long-termers with substantial equity and those looking to get out with enough for a steak dinner.
If prices went down, those with little or no equity would just stop making payments – then it would be up to the TBTF banks to decide whether they want to cause a foreclosure tsunami, or let the defaulters ride for free as long as they mow the lawn. You can guess which path they’ll take.
The long-termers with substantial equity? One more notch down and forget it – they aren’t going to give them away!
The initial scramble to buy something – anything – once rates went up would be exciting, but short-lived. Fear/greed would overcome buyers who have been very patient, and they’d gladly get back on the fence in anticipation of plummeting prices.
Consider who the sellers would be – only those that need their equity to keep breathing. The FedGovBigBank troika will take care of the rest.
If mortgage rates start rising, it’ll likely cause fewer and fewer sales. There is probably enough organic demand who will keep buying with cash or big down payments to have pricing look statistically flat or lower. But if there are few houses to buy, who cares.
Interest rates are not going up until house prices start going up (well maybe back to 5% or so). Why would they? Govt is doing all they can to keep rates low and I read recently 2010 + 2011 vintage loans have the lowest default rates in history. Rates will only start going up once heavy demand for loans come back (indicating to me prices going up).
Agreed, with emphasis on heavy demand. It would take something unforeseen to push rates much higher without heavy demand, but the Fed has handled everything thrown at them so far – thank you taxpayers!
“I read recently 2010 + 2011 vintage loans have the lowest default rates in history.”
I read that too, but I’d hardly call 2010-2011 “vintage”. And, I’m pretty sure heavily increased underwriting standards has contributed to lower default so far for such young loans.
Why would they?
Because the Fed isn’t the ultimate arbiter of rates, the bond market is. Given that the U..S is still the world’s largest economy and home of the world’s reserve currency, though, the Fed is given a lot more rope with which to hang itself.
As a practical matter, the Fed IS the bond market. Hence, though rates are not a good historical predictor of price, the market faces no interest rate risk for the foreseeable future.
Only a blind crazy person thinks interest rates don’t correlate to housing prices. Wow.
Low interest rates cause monetary expansion which leads to price inflation. Everywhere. Housing got an extra boost in pricing thanks to public guarantees and silly tax breaks.
Artificially low rates also tempt humans into moral hazard, increasing demand, hence prices.
Raise rates and homes instantly become less affordable, defaults rise, prices decrease.
As a practical matter, the Fed IS the bond market.
Yet another unsustainable trend.
buy low, sell high? If interest rates went real high the housing market would be toast. they will keep rates low and savers broke until housing shows signs of life.
We now tend to move from one asset bubble to the other.
“Yet another unsustainable trend”
Absolutely true. One of the many things that past and current troubles n strife has demonstrated is that “solution” and “sustainable” are not one and the same. There are many, many examples of this.
One wildcard is whether President Newt would give in to the house GOP stalwarts and shut down the Fs.
Private lenders aren’t going to give 30 year 4% loans, I don’t think, in the absence of gov’t repurchase…
President Newt??
This is a wildcard more likely to explode:
http://www.youtube.com/watch?v=5WEK6HgXBsQ
If the cops start killing people, and we see riots in the street of America, all bets are off.
30 year fixed mortgage rates are based neither on supply and demand for housing nor the whims of the lenders. They are based on the yield of 10 year Treasury bonds, which will rise when the Fed stops buying them – either because core inflation gets too high or unemployment gets back to whatever they consider normal – in short, not very soon.
I’m convinced that gov/thefed will spend us into a Greece situation before raising interest rates. As long as interest rates are low house prices are high. As long as house prices are high fewer and fewer buyers will ever actually own anything. Banks make more money off servicing mortgages with fees than holding 30 debt on their books.
Shadash #13 – The government won’t be the one raising rates, investors will. When investors no longer believe in the Fed’s inflation-fighting commitment, private sector rates will rise (thereby choking the economy). The Fed cannot keep rates low all by itself, only on the margin.
When investors leave the 10-30 year bond market for other options, rates will rise regardless of the possibility of an increase in economic activity (which we believe will be minimal at best).
Before we all believe that ‘low rates are here to stay and its a new paradigm’ one only needs to look back 1 year when the 10-yr was around 3.5% vs today’s 1.85%. 2 years ago it was near 4%.
Simply moving back to 3% on the 10yr is a 62% rise in the rate from today. Remember that this ‘uber low’ rate world is just a blip on the long run.
There will be economic shocks, and at times, rushes into Treasuries over the next few years. Thus, we are expecting Treasury rates to rise at least this much during our real estate based investment/holding period of 5-7 years (remember we are more concerned about our exit price down the road which is not our view of the world today, but our buyer’s view during his 5+ year holding period) and have recently adjusted our investment philosophy accordingly.
Lastly, I would fully subscribe to Rich T’s analysis of buying now at the low rates for a personal property purchase. That makes all the sense in the world. Investment property is different.
“I read recently 2010 + 2011 vintage loans have the lowest default rates in history.”
I think this stat only applies to Freddie and Fannie loans. FHA loan delinquency has been rising.
http://www.calculatedriskblog.com/2011/11/mortgage-delinquencies-by-loan-type.html
Of course FHA as a percentage of new purchases has been soaring as well. From 4.2% in 2006 to a little over 40% now. It just goes to show that available leverage might be a lot more important to home prices than interest rates.
http://cnsnews.com/news/article/taxpayer-backed-fha-guaranteed-40-percent-initial-home-mortgages-2010
Living – “It just goes to show that available leverage might be a lot more important to home prices than interest rates.”
You are exactly right. On my commercial side, the best performing asset class (based on pricing) has been apartment/multi-family.
While this is in part due to the housing melt down and increased renter pool, it is more to do with the tidal wave of gov-backed lending cash that is available.
the “F’s” are pumping debt money at 85%+/- into the apt world at low low rates causing investors to bid up the assets to ‘bubble level’ prices.
All other asset classes rely on pure private debt/equity funds and have very tepid debt markets.
Investors go where the cheap cash is. Trouble is brewing in the frothy apt market if things cease to run perfectly (rates, occupancy, etc) as the yields are horrifically low in today’s pricing (sub 5%).
So I guess the logic is that if rates rise to 5% then prices will crash an additional 25% which will bring them back to around 1988 levels even though in the late 1980s interest rates were 10%?
Pemeliza – if you are referring to my #16 post re: sub 5% number….the post talked about MF properties yielding sub 5%, as in cash flow net yield…not rates. I am not inclined to take the risk of buying expensive real estate, a near historical highs, with rates closer to the bottom than the top. Your Real yield is likely 2% or so….
Rising rates in commercial, coupled with anemic occupancy & rent growth, goes directly to the bottom line value of the property.
Residential has different utility than commercial and thus is priced on a slew of different factors.
All we know is that I would rather prepare for rising rates and be ‘disappointed’ they don’t happen, than the opposite.
I agree that one should prepare for higher rates but I just don’t see how prices can fall that much further (say another 25-30%) than they already have regardless of interest rates. Like Jim mentioned, I think you are ultimately going to run out of organic sellers because almost no owners would have any serious equity. Then the argument for lower prices comes down to the idea that everyone is going to lose their homes and the banks are going to be forced to liquidate at lower and lower prices. The problem with that argument is that it only applies to weak hands and I think/hope that a good number of those have already been shaken out. The strong hands always have the option of just making their low-rate mortgage payments and waiting it out.
“I agree that one should prepare for higher rates but I just don’t see how prices can fall that much further (say another 25-30%) than they already have regardless of interest rates. ”
The only way prices fall that much further is a credit freeze. If people can’t get loans to buy houses then housing could go to <1x income, but the Government/Fed will certainly do just about anything possible to prevent that.
pemeliza and livinincali,
Though I consider the likelihood very remote, longer-term declines in prices of assets have happened quite frequently in the past. More than just “credit freezes”, there are 2 basic kinds of impairment that could cause long-term declines:
1. Catastrophic (such as credit freezes, but also include major natural disasters such as earthquakes, floods, oil spills) but also include man-made such as nuclear catastrophes (think San Onofre or Fukushima) that make the land undesirable or unlivable.
2. Long-term demand deficits. An example I use is rust-belt cities that have lost population despite having very desirable cities and homes. If you’re housing 1M and have 2M homes… prices fall until they reach maintenance cost parity. (Detroit was once the hub of commerce and culture in the US just as California has been one since the 1990’s)
I stress again, I consider this remote, but there are many possible reasons for long-term weakness of prices, and the Japanese experiment of the last 25 years should be present in everyone’s mind. There are significant global forces pushing down income growth in America far below inflation… and add long-term pension and social program requirements and consider that some effective tax rates might need to double sometime in the next 20 years and you’ll quickly see why there’s little direction.
Who wants to buy a house if your entire industry is permanently gone in a decade? Or, if your expendable income for housing shrinks by 50% or more? We unfortunately can’t base our entire economy on selling houses to each other for increasingly higher prices.
Personally, I’m hoping for major technological dispensations to change the work/live landscape. I also believe that California (for all its warts), and especially coastal Cali will benefit in this future.
Chuck