Does rising rates really equal lower prices?

irvinehomeowner

Well-known member
So one of the things that gets pushed on the IHB is that interest rates can't stay this low for long and when they rise, prices will have to go down.

So I had my 1st grader do some math and this is what we came up with:

Say you bought one of those Woodbury 2010 New Home Collection houses for $750,000 at 5% interest. You put $150k down (20%) and you have a loan of $600,000.

Your monthly payment would be about $3220.

If interest rates rose to 6%, to get the same monthly payment, your loan should be around $537,000. Add your $150k back and you're looking at a sales price of $687,000.

Now if that rate rose to 7%, your loan would be around $485,000, meaning your sales price would be $635,000. And to make it worse, you only wanted to put 20% down instead of your $150k, then that price would have to be $606,250.

So even if interest rates were to rise to 7% in the next 2-3 years... do you really think a home that sold for $750k today... will be selling for $635k (or $606k) in 2013?

That's nominally a 15-20% drop. So I should wait for those $1mil homes to come down to $800-850k?

Just like the opposite of gravity... what goes up is faster than what goes down. Do any of you think that when people start pricing homes for sale that they are going to take into account higher interest rates and adjust accordingly?

"Oh... we would have sold this home for $750k when interest rates were 5%, but now that they are 7%, I guess we can list it for $620k"

I'm not a real estate expert, a math wizard or an accountant, but something tells me that my psychology minor is really coming in handy here because I think it's much harder to push these prices down than some analysts think.

What am I missing?

[bear shields activate]

EDIT: Sorry... OCD about typos and grammar stuff.
 
So even if interest rates were to rise to 7% in the next 2-3 years... do you really think a home that sold for $750k today... will be selling for $635k (or $606k) in 2013?

IHO. that is what i am waiting for and your scenario above is what is supposed to happen. If rates rise to 7% in 2-3 years and Irvine home prices still remain at $750k or goes up, I am seriously going to have to reconsider about buying in Irvine. There comes a point in your life where you have to ask yourself, "Is this worth it?" Am I willing to pay $120,000 for a 5 series BMW?
 
I'm no economist and putting this out as a question more than anything --- but wouldn't it be reasonable to assume that a future rise in interest rates would be in step with inflation....and therefore also be in conjuction with wage inflation? So would buying power really change with higher rates? When I read the rantings of the tinfoil hat crowd on IHB I always ask myself if they are also considering that wages may also be inflating along with interest rates. So purchasing power would remain the same. But maybe I'm not thinking about it correctly. Feedback welcome.

To answer your question, I don't believe there is any effing way that $750k house will cost $635k in three years.
 
[quote author="ck"]
To answer your question, I don't believe there is any effing way that $750k house will cost $635k in three years. [/quote]
I know.

And I'm not sure if IR ever graphed that scenario out on the IHB. I mean he may have at one point but sometimes I get lost in all the YouTubes, lyrics and schadenfreude being thrown around.

Sure... we all can understand that concept, that rising rates should create downward pressure -- but I don't think they ever proved that the ratio would be equitable. And with so many non-fundamental factors going on in Irvine, odds are the math is going to be skewed against our favor.
 
The whole point of rising interest rates would be to slow down/counteract excessive inflation. Tax hikes can potentially happen as well, lowering the purchasing power further.

Also, if you look at the mean wage increases, in recent years only the top 5th percentile (or somewhere around there) outpaced inflation. Since we are in a historically low tax period, the expectation is that most certainly they will go up in the next few years (at least for people who can afford Irvine homes).

On a (somewhat) related note, in a lot of pricing scenarios current rentals are used to determine fair market values. What fails to be addressed is that we currently have inflated rents as well.

So, I agree in that there are a large set of variables that need to be considered. However, it is not that straightforward to identify their contribution (positive or negative) and magnitude.

Perfect storm (if you have cash in the bank) is higher interest rates, higher taxes, no/little inflation.


[quote author="ck"]I'm no economist and putting this out as a question more than anything --- but wouldn't it be reasonable to assume that a future rise in interest rates would be in step with inflation....and therefore also be in conjuction with wage inflation? So would buying power really change with higher rates? When I read the rantings of the tinfoil hat crowd on IHB I always ask myself if they are also considering that wages may also be inflating along with interest rates. So purchasing power would remain the same. But maybe I'm not thinking about it correctly. Feedback welcome.

To answer your question, I don't believe there is any effing way that $750k house will cost $635k in three years. [/quote]
 
[quote author="irvinehomeowner"]I like it when smart people post.

Me so dum.[/quote]

I like it when smart people post, too. Problem is, I wonder sometimes if all the economic smarts from the old world don't apply anymore in the age of gov't intervention. Posts like GC's seduced me when I moved to Irvine in fall 2005, and convinced me to lease a home and wait. Now here we are pushing 5 years later --- and I'm not a heck of a lot closer to my dream house in Northpark than I was way back then. And still the IHB bears keep telling me "it's just around the corner, CK". I just had my 38th birthday. My kid is in 1st grade. Starting to wonder if its passing me by...

Like Agent Mulder, I want to believe....but.....
 
I totally relate CK... it's why we sold in 2008 because of this bloodbath that was supposed flood over Irvine like a bad disaster movie.

All the logistics added up... but here I am... out most of my down payment and it looks like that house could still sell for what I bought if for in 2005.

Even if the prices in Irvine declines steadily at 5% each year... it would take 4 years for that house to get to what the experts were predicting.

And I think the bottom is closer than they say... isn't that one of the reasons why IHB turned into a brokerage?

I'm giving it until 2013... if I don't see dramatic reductions by then (who knows... it might be the opposite)... I will have to settle for a 2-car garage (GASP!).
 
IHO, in theory you are right; home price and interest rate should be correlated. However, we've seen that prices are stickier than one would expect. Also, psychology as you describe it probably plays a very big role. What would cause such a big decrease would have to come from foreclosures/short sales.

If interest rate increase by 1% and wages increase by 1%, you would still see a major decrease in price (in theory). Interest rate is highly leveraged in a home purchase, much more than wages which is a 1:1 relationship.
 
More psychology is in play when it comes to new homes. Since credit restrictions are so tight... what percentage of the homes being sold new in Woodbury today will be in distress in the next 3-4 years? High or low?

I would say low so even if there were foreclosures elsewhere... they may have little effect on these homes. Like BK says... it will take a neighborhood fire sale to drastically reduce prices in a newer neighborhood.

Look at Qual Hill... the Tapestry homes sold for $900k in 2003... they are still moving at about $1.1m now... what year are we suppsed to be back at now? And with 40% average down payments in Irvine over the last year... I doubt there will be many underwater loans here for a while. That doesn't mean there aren't distressed properties here... but I think ratio-wise... it's less here than other areas built new at the same time (like Ladera).

There are no FCBs.
 
Quail Hill is no different than all of Irvine. Even "older" neighborhoods are sticky.

If you are hoping for the New Home collection to trade lower, well...good luck with that!

Now, how will next developments be priced...who knows?

This works on a macro level, real estate is local (to a certain extend) and as far as recent experience goas, Irvine IS different.
 
my guess what will happen is that interest rates will go up, sellers will still stay with the high/higher asking prices because why should get less than their neighbors or friends sold previously, but wages wont increase enough to offset the increase in interest rates then it will become a test of time. Homes will just sit on the market, probably chasing the market down, until price reductions occur where people can afford them.
 
[quote author="mogul"]Irvine IS different.[/quote]
If you said this on the IHB... you would get friction.

I guess since most of those people are on the other forum... you don't see the anti-Irvine sentiment as much.

I should temper than Quail Hill remark with the fact that those same Tapestry homes were selling in 2006 for about $1.5m so they have come down... but I haven't seen 2003 prices yet. And any type of foreclosures either languish or get gobbled up quick in auction.
 
[quote author="ck"]Like Agent Mulder, I want to believe....but.....[/quote]

CreditSuisseResetMarch09.jpg
 
I may not be recalling this correctly but I keep seeing this chart move every 6 months.

If the height of the OArm financing was from 03 to 07 on the steep bubble rise... before the credit money crashed... shoudn't have these recast starting in 08? And with current low rates... isn't this going to be extended out more since there is no negam?
 
I like it, GC --- but I am just starting to wonder if an Irvine specific chart would look the same. Now that we are into the second month of 2010, I would have expected to see some serious, serious distress in some of the late bubble neigbhorhoods (Northwood II/Woodbury both came online in 2004-05, correct? With most of Woodbury selling at the absolute peak). And yes, while there are some hit and miss foreclosures and short sales in those neighborhoods, it is far from the "blood in the streets" I thought would come to pass.

Maybe everyone in those neighborhoods took out 5 and 7 year adj neg-am ARMs and they all hit this year though 2012? Or maybe the slaughter is just not coming at all? I dunno....But I turn 40 in 2012, and my kid turns 9. I'm don't know if I can hang around to find out...

But don't get me wrong, I am better off for waiting --- if I buy this year I will save at least 10-15% from peak Irvine prices....But the 2007-era promises of 40%-50% or more don't sound plausible anymore. Since at least the Obama adminstration started, I don't think there has been any decline at all. Someone please tell me I am wrong about that.
 
2i23l1i.jpg


This chart above is what made Panda happy in 2007. In 2010, Panda is start to look very SAD <!-- s:( --:mad:<!-- s:( -->
 
[quote author="irvinehomeowner"]I totally relate CK... it's why we sold in 2008 because of this bloodbath that was supposed flood over Irvine like a bad disaster movie.

All the logistics added up... but here I am... out most of my down payment and it looks like that house could still sell for what I bought if for in 2005.

Even if the prices in Irvine declines steadily at 5% each year... it would take 4 years for that house to get to what the experts were predicting.

And I think the bottom is closer than they say... isn't that one of the reasons why IHB turned into a brokerage?

I'm giving it until 2013... if I don't see dramatic reductions by then (who knows... it might be the opposite)... I will have to settle for a 2-car garage (GASP!).[/quote]
We bought a house in August 2009. We knew we wouldn't be buying at the bottom, but we got a great 30-year fixed rate of 4.625%. Our real estate lawyer said it was the lowest 30-yr fixed she has ever seen in her 20-year career. We also were able to buy in a neighborhood that is highly desirable, and houses don't come on the market very often here. We found the home of our dreams - and we didn't have to compete with anyone else. We took our time, did all the inspections, and bought it. I think homes will still come down in price, but I LOVE my home - I got TIRED of renting for the past five years. Life is short - and I want to make memories with my family and friends in MY home and decorate it the way I want to decorate. We can finally buy furniture because we know what we need and where it will be placed.

We will hopefully be here for many, many years, so I'm not worried about the downturn of the market. Everything is cyclical, prices will rise again.
 
We seem to be stuck at about January 2009, don't we? What happened in January 2009? I guess IrvineRenter didn't factor gov't intervention into his forecast. And he grossly underestimated how the desireability of Irvine increased since the 90's real estate bust.

I used to say things like this on IHB. And I was laughed out of the room. I'm sure BK can remember me stating on IHB how our friends and family from LA would swoon about us living in Irvine and how they were strategizing to come here, too. Of course that was always met with a chuckle and "that's just anecdotal, CK --- your friends won't save the market".

Looks like they have so far, at least since January 2009.
 
[quote author="ck"]We seem to be stuck at about January 2009, don't we? What happened in January 2009? I guess IrvineRenter didn't factor gov't intervention into his forecast. And he grossly underestimated how the desireability of Irvine increased since the 90's real estate bust.

I used to say things like this on IHB. And I was laughed out of the room. I'm sure BK can remember me stating on IHB how our friends and family from LA would swoon about us living in Irvine and how they were strategizing to come here, too. Of course that was always met with a chuckle and "that's just anecdotal, CK --- your friends won't save the market".

Looks like they have so far, at least since January 2009.[/quote]

I remember vividly CK. My earliest IHB posts were about the psyche of the Chinese herd buyers. They are brand conscientious and will pay a lot for the label with inferior quality.

Developer spent more money on polishing the label than designing homes with decent front door appeal.

So far the strategy has worked and rounding up herd to the slaughter house including a Santa Ana yogurt shop owner buying a million dollar first home.

The math does not add up Mr. Cantaloop?
 
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