Falling home prices, rising interest rates?

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Fraychielle_IHB

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<p>I read the stuff on Prof. Piggington's site.</p>

<p>I have to say, the argument is quite convincing. I had figured a 10% drop in the next 2-3 years, but I guess you renters almost got me convinced about the possibility of watching house prices drop 20 - 30 - 40% as they revert to the mean. </p>

<p>The thought of the proceeds of selling a home being unable to cover the cost of a mortgage is not a pleasant one. Neither is watching a neighbor who bought later pay 20% less for the same home as you and paying $600 less per month (calculations below) / $7200 per year.</p>

<p>Now one of the components of Piggington's argument is that as interest rates rise (which they will ... I don't think anyone disputes that, the question is by how much) and lenders get picky in who they lend to, those who have ARMs,100%, or "creative financing" will be increasingly unable to afford their homes; the default rate will go up / people will need to sell to escape their loans. Couple that with falling demand (as prices are too high for people to afford with 'conventional' financing) and that means prices drop. At some point in time, prices will drop enough that they are affordable, and stabilize at a new point in the supply / demand curve.</p>

<p>That makes sense to me, but falling home prices and rising interest rates tend to counterbalance each other.</p>

<p>So I did some calculations: what interest rate is required to result in the same monthly mortgage payment compared to what I can get now? I also included property tax at 1.75% and used a baseline of a 500k mortgage at 6% for a total home value of $625,000.</p>

<p>Baseline = 500k at a mortgage rate of 6% - $4147/mo</p>

<p>5% price drop = 475k. Interest rate required = 6.625%</p>

<p>10% price drop = 450k. Interest rate required = 7.375%</p>

<p>15% price drop = 425k. Interest rate required = 8.125% </p>

<p>20% price drop = 400k. Interest rate required = 8.875%</p>

<p>25% price drop = 375k. Interest rate required = 9.875% </p>

<p>30% price drop = 350k. Interest rate required = 10.875% </p>

<p>35% price drop = 325k. Interest rate required = 12% </p>

<p>40% price drop = 300k. Interest rate required = 13.25%</p>

<p>In the next 5 years, I can see mortgage interest rates going to 8 - 9 % if economic growth speeds up to the point where the Fed has to raise rates to keep things slow. If I bought now, that means my home can go down in value 15-20% and I will still be paying the same amount as future buyers.</p>

<p>I guess what I need to determine is, </p>

<p>1) how much will home prices fall?</p>

<p>2) what will the mortgage interest rate be?</p>

<p>Oh, for a crystal ball right now ! ! !</p>
 
<p>Interesting calculations Fraychielle. But I think you are overestimating the importance that interest rates have had and will have on prices. Even with the low interest rates we have now, payments are much higher than the historical norms in relation to income and rents. So don't assume that payments will stay the same. Prices could very well fall significantly even if interest rates don't budge. Of course, higher interest rates would certainly help, but there are plenty of other factors stacked against home prices right now.</p>

<p>My opinion on your questions:</p>

<p>1) More than you think.</p>

<p>2) Less than you think.</p>

<p>A crystal ball would be nice, but luckily for all of us common sense and a solid understanding of econ can get you pretty far too. </p>
 
<p>I understand your point. The purpose of this exercise was for me to see, at each given % home drop, at what mortgage interest rate x% is necessary to offset that drop.</p>

<p>Then, to see if that x% is reasonably possible. 7-8% I can see. 12% ... unlikely in the next 5 years. But you never know ...</p>
 
<p>Fraychielle, I don't know where overall rates are headed so I won't speculate. I will, however, speculate that subprime and alt-A are going to carry more of a premium going forward. For example, a high-risk loan that's 3% above today's "market rate" could be 6% above next year. Those with some cash to put down, minimal debt, and high credit scores will be way ahead of the game.</p>

<p>Now is when the prudent sit back, save cash, say "no" to the new MB lease, and wait for the prolifigate to start puking-up their assets.</p>
 
<p>I'm in banking and rates are up 1% in the last month. I don't understand how people can think 10% price drop. Most people can not afford what they have if it was not for the help of stated income. Now that has become very strict and almost impossible to get approved. Renters are in the best shape so don't worry. Many people used their houses as ATM's which is really sad. I used to tell them to get a 15 and pay off their house. However, in the end they would go with a 30 year fixed for 5 with $50K cash out. </p>

<p>My prediction is 30%. </p>
 
<p>Hey Wendy, </p>

<p>Since you are in banking, I'd like to pick your current institutional knowledge. In today's climate of tightening mortgages, how does one actually finance a new purchase in astonomically priced SoCal ? I understand that a 10% - 20 % deposit is becoming the norm, and primo credit is required.</p>

<p>Hypothetical : Say Pat makes 100 K a year gross, has no debt, 800 credit score...however, Pat has little or no cash to put down. Pat definitely wants a 30 year fixed rate mortgage. Does Pat still get a loan or is skin in the game absolutely required (as it should be). If Pat does get a loan, how would you structure it.... and lastly, how MUCH of a loan does Pat qualify for at this salary?</p>

<p> </p>

<p> </p>
 
I brought this topic up about a week ago when Treasury rates on the 10 & 30 yr were spiking...boy it's gotten worse!!





http://forums.irvinehousingblog.com/discussion/351/so-much-for-lower-interest-rates/#Item_3





Well, here's my statement to those who always ask me...what needs to happen for home prices to go down.





My reply "If home prices, just stay flat and don't go up in value...people will be screwed no matter what."





People often look perplexed until I point out to them....the Federal Reserve will not (inflation fears) and cannot (foreign buyers of US debt) lower interest rates...but there is a possibility they can raise it.





All the people who were hoping to re-fi before their teaser rates on their ARMs/IOs reset are in for the worse rude awakening of their life.
 
<p>optimus - I am glad you are able to read the Fed statements like I do. The word inflation is used nearly twice as much as housing in every statement. I think when they state that inflation remains their primary concern it means they are concerned with inflation.</p>

<p>I added in the same topic as you a chart for the fannie mae 30 year 5.5% mortgage bond. Here is the 6% from today for the last six months. It almost broke through the second support line and the 5.5% did break through the second support line. A drop like this in bonds is like a 500+ point drop in the Dow. In two years this is the steepest and longest drop the bond has seen. </p>

<p><img alt="" src="http://img103.mytextgraphics.com/photolava/2007/06/12/fnma30yr611-1iaap8uz.jpg" /></p>

<p> </p>
 
blue - Here is a good place to start <a href="http://www.investopedia.com/university/bonds/">http://www.investopedia.com/university/bonds/</a> and from there you can search around there for more articles.
 
<p>Trooper</p>

<p>30 year fix and 100K?? Our low income loan is up to $86k a year. Its 100% financing and no PMI so if you could just make a little less :) The only bad thing is you can only spend $300 K HAHA its a joke until housing comes down. I was pricing a one bedroom the other day for $375K and it came to about $3100 on a 30 year fix . This included tax and HOA. The key is Debt Ratio. All you have to do is divide your gross income to your debts. Your debts which includes your new mortgage should be under 40% if you don't want to be house poor. Also, 30 year fix you are going to need a down payment. I can't see why you can't get 100% with over 720 credit score, but the product won't be a 30 year fix. </p>

<p>P.S. Rate went up again today. When is it going to stop. I have a goal to make :)</p>
 
<p><em>"The key is Debt Ratio...Your debts which includes your new mortgage should be under 40% if you don't want to be house poor."</em></p>

<p>The threshold for ensuring one isn't house-poor is 30% for the mortage-related expenses. Even 28%isn't a walk in the park. If someone throttles up to 40% all on housing (even in the absence of other debts like a car payment), you really are looking for trouble, because you've left yourself no flexiblity.</p>

<p>SCHB</p>
 
<p><em>"Seeing a lot of 8% rates appearing on rate sheets again"</em></p>

<p><a href="http://www.brokeruniverse.com/grapevine/thread/?thread=415105">http://www.brokeruniverse.com/grapevine/thread/?thread=415105</a></p>

<p>[munch-munch] I lof popcorn!</p>
 
<p>OC, Holy CRAP ! The rates are skyrocketing so fast ! Thanks for the link. NOW who's got the smug look on their faces ..... US ! I remember in 1989 when I bought my first place, I paid 11% for my FHA 30 yr fixed ! And that was a good deal.</p>

<p>Wendy,</p>

<p>That's what I thought. Someone in another thread had a 100 K salary and was wondering what he could afford with a fixed 30 yr. I knew it was not going to be much, but didn't realize he can afford...um, er....nothing ! Does the lender count the future HOA monthly fees into the "debt ratio" for qualifying purposes....or not.</p>

<p> And 3100K monthly for a one bedroom ? Just say no. </p>

<p> </p>
 
<p>I just checked <a href="http://www.bankrate.com">www.bankrate.com</a> and there is indeed one (e-loan) 30 yr jumbo today at 8.12 % ! This is the first time I've seen it hit this high.</p>

<p>Wendy, uh oh.... </p>
 
<p>HOA is counted in the payment. Well at least we do. </p>

<p>My loan officer told me today she is going to look for another job. The refi gig is up. Does anyone know if this increase is here to stay???</p>

<p>. </p>
 
<p>Wendyinoc,</p>

<p>"anyone know if this increase is here to stay???"</p>

<p>Probably so - it depends if the foreigners keep reducing their purchases of our T-Bonds. We need their cash!</p>

<p>Talk about a perfect storm: loans resetting, higher interest rates, swelling home inventories.</p>

<p>But according to Gary Watts, all the old people from the mid west are moving here with all their money and all the foreigners are coming here too. So, these buyers will keep the house prices stable. You should tell your loan officer to stay put!</p>

<p> </p>

<p> </p>

<p> </p>
 
wendy - Rates improved today and on a technical standpoint further improvement could happen if it continues tomorrow. However there is a lot of economic data that could change that really quickly. Tomorrow is producer prices and Friday is consumer prices. Today's retail sales was overrated and once they realize that the 1.4% increase MOM isn't nearly as important as YOY it will be another bad day. It is not just foreigners selling as it is domestic selling right now. If it continues though foreign sellers will be selling. Even if we do see a slight correction it could be a dead cat bounce and further selling would begin.
 
When we talk of 30 to 40% drop in price. Are we talking of the current appraised price? Cause I bought my house back in the 80's for 70k. Now, it's appraised at 600k. So the prediction is that my appraised value of 600k will have a 40% drop? Whoa!!
 
Add to the fact that Bear Stearns is trying to dump a big chunk of mortgage backed securities. We might see some more fallout so be prepared.
 
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