Bye bye rock bottom rates?

yep, rates should have no where to go but up from here. Put it this way, would you buy long term treasuries at these prices with the distinct possibility of high inflation?

Nope, not that attractive. And very importantly, that's how the chinese and japanese central banks feel. Monetizing the debt tends to be inflationary.

All things considered, a typical borrower loses around 5% in buying power for every 1% increase in rates. This means further downward pressure on prices.

That said, I believe the bigger issue is not rising rates, but the fact that many potential buyers are broke. As others have pointed out, times are particularly tough for “move up” transactions. Many “move ups” are seeing their equity completely wiped out when they sell. Consequently, they do not have money to make the down payment on a new home. In other words, they are stuck. The problem is particularly acute in the higher end markets where buyers must put down 20-30% to secure jumbo financing. Let's think about that for a second... We're talking about asking buyers to put up $200-300k cash for a down payment on a $1 mil home when the equity in their previous home is gone. That's a lot of money. Adding insult to injury, 401(k) and stock portfolios are also way down in value, further limiting buyers access to cash. It is a classic “deleveraging” scenario. Potential buyers simply can't buy. This is why transaction volume is so low. Ultimately I believe this--not rising rates-- is what will put the most pressure on prices.

I've said this before, and I'll say it again. Home prices will continue to fall until buyers can once again afford to make purchases. I don't see any way around this.

Don't worry your pretty little head about it Scott. If rates get too high the Fed will magically create another couple trillion dollars to buy up more T-bonds & mortgage backed securities. That should settle things down for a few months

You snooze, you lose. All those people that were *sure* rates were going to go down to 4% - missed it. Rates are still ridiculously low...for now.

the economy despite BO's spending spree will continue to tank, and with crude at $68 it is clear things are getting worse not better. We are headed for a Japan like scenario with zero % real interest rates and continuously declining real estate prices for several years. Crude is being bid up because it was oversold, not because of any economic recovery, nat gas should rally next...

Great article in today's WSJ about tax dollars being used to subsidize conforming mortgages:

“The U.S. Federal Reserve's program to keep mortgage rates low by buying securities and Treasury bonds so far has been costly and seems to be having a fleeting impact.

An analysis of the timing of the Fed's purchases of mortgage-backed securities by J.P. Morgan Chase & Co. shows the Fed is "under water" on its portfolio by about 1%, and it would have to take about $5 billion in losses if it were to mark its portfolio to the market.”

The government cannot keep home mortgage rates artificially low forever. Rates will inevitably rise to levels supported by the market, and home prices will continue to fall.

Go check out the full article.

Correction from my earlier post:

“All things considered, a typical borrower loses around 5% in buying power for every 1% increase in rates. This means further downward pressure on prices.”

The decrease in buying power is actually closer to 10% per 1% change in mortgage rates.

My apologies. I was in a hurry this morning.

Lance makes a great point that in certain price breaks, particularly in higher priced metropolitan areas, higher downpayment requirements may squeeze the number of qualified buyers - even if they can afford to pay the mortgage.

Sellers may have to weigh the value of a lower offer from a cash buyer, versus marketing only to a diminished pool of buyers who can achieve the necessary loan approval. This potential reality is no easy concept for the average seller to swallow. During the boom, liberal loan terms seemingly were being offered to everyone. The "unlearning" process we're going through now is slow and painful. Lance may be right when he says, "that many potential buyers are broke". The $8,000 first-time buyer tax credit may make a difference in affordable parts of the country. It's not the answer for Westchester County, NY or New Canaan, CT.

In reference to #8 . . .

That credit will also not make a difference in desirable towns within Route 95 in the Boston Metro area. I told the woman I'm working with today that for a variety of reasons I think that my wife and I are at least a year away from seeing homes in the towns we're looking show real value in their asking prices. Her first (and pretty much only) counter was "don't forget about the tax credit that you'll want to use this year." Even as first time home buyers with a good income, a modest down payment, and decent reserves that credit does little when "starter homes" that aren't dilapidated are being routinely listed in the high 3s and low 4s. I for one welcome the return to market dictated interest rates.

As Scott and EH point out, interest rates are still very low by historical standards. But house prices are still very high. So where's the advantage? The low interest rates may be a boon to homeowners looking to refinance, but don't help a wannabe buyer like me. I'd rather buy at a higher rate but at a lower house price and then refinance when an opportunity arises. As for that $8000 tax credit, I agree with reduce media that it is pretty much a non-factor - it is not only too small to persuade me to by something overpriced and that will strain my finances and standard of living, but is certain to be canceled out by coming tax increases.

When a property price in a place I'd like to live comes within about 3x my gross salary, or can be rented for at least as much as it will cost me, I'll buy. I'm not waiting for a bottom, or in a staredown with any sellers, or waiting for the lowest interest rates. In this sense, nothing has changed since I began looking in 2005.

This is the rising interest rates with high inflation scenario that some had forecast (e.g. Peter Schiff). The US needs to sell trillions in bonds. Foreigners are souring on US debt. There are two options: 1) allow rates to rise so that foreigners will be willing to buy the bonds - this will cripple the American consumer and US government that relies on low interest rates to service massive debt levels; 2) monetize the debt (i.e. FED buys bonds) to keep rates (temporarily) low - this will cause the dollar to plunge. The FED has embarked on #2. Problem is, it's effectiveness at lowering rates is diminishing. The FED is going all in and the bond market is calling the bluff.

The triple whammy of massive debt levels, rising interest rates and increasing price inflation will cripple the American consumer.

Lance is right on the money. 1$ increase in rates needs a 10% drop in prices.
Just wait till rates are at 8% because of all this printing thats going on and our parabolic rise in National Debt.

As an avid reader of blogs such as this one, I am alarmed to see a trend wherein the same story, told time-and-again, is passed off as truth or reality. In this case, I am referring to comments such as #2 in this post, where increased mortgage rates is expected to impose a strong downward pull on home prices.

While affordability of a property or price range will change for any given buyer, the net effect will be a reshuffling of who bids on any given property. If a buyer can no longer afford a property listed at $1 million (and the subsequent 'jumbo' mortgage), their attention may shift to properties listed at $800,000. Those buyers priced out of $800,000 may now look at properties in the $600,000 range, and so on. And those buyers that simply can no longer afford to purchase any property in their desired location may have to expand their search to other outlying areas. It is a fallacy to believe that simply because *one buyer* can no longer afford a property, that *no one* can afford the property. Someone else can and will purchase that property, and while the final sales price may be lower than the original listing, it will not necessarily drop as far as 5-10%. Those individuals that try to wait for such a price drop will be disappointed when someone else out-bids them well before the bottom is reached.

This trend will be particularly true in desirable areas such as downtown Boston. Similar to areas such as San Francisco and Manhattan, downtown Boston is a geographically limited area, and supply will always be more limited than demand . . . this is a battle the seller will always win. While it is true that Manhattan and Boston have experienced declines in real estate values, there is a trend toward resurging interest at the new pricepoints. When push comes to shove, buyers realize that they should not allow the *possibility of a great deal* get in the way of the *reality of a good deal*. This is why property values in downtown Boston will not actually decline as far as their theoretical lower bound: buyers realize they are getting good value just before the market bottoms out, and they are willing to buy at this point. For example, even if pundits claim the market in Boston is headed toward year 2000 levels, rational buyers will be happy to purchase at 2001 levels, because this represents such a discount from 2006-7 levels. To state this another way, as price levels drop on real estate, more potential buyers become interested in purchasing real estate. If they enter the market and see a property they like at a price they are happy with, they will buy that property. Thus, a floor on housing prices is established, and the market may never actually reach its nadir. As the market reaches this adjusted bottom and begins to rebound, more and more buyers will leave the sidelines and actively enter the market . . . no one wants to miss the boat (on housing prices or on mortgage interest rates) again.

downtown please provide any data to support your opinion. a layman's understanding of basic economics should answer why you continously see people treating the concept that an increase in the cost of capital exerts negative pressure on price as a reality. it's simply because it is.

Downtown,

Its all about the Monthly Nut... If someone can afford $2,000 month payment for a home thats all they can afford. If rates go down that same $2,000 can buy a more expensive house. If rates go up the $2,000 a month will purchase less house. End of story.

Downtown Buyer - couple of thoughts on a couple of your points above:

#1: "It is a fallacy to believe that simply because *one buyer* can no longer afford a property, that *no one* can afford the property."

----This reshuffling theory only makes sense up to the point where the only people who can afford such a property are simply not the kind of people who would buy such a property!
I've pondered this before: take a starter-type home which in recent years was $180-200,000, became $420,000, and is now on sale for $375,000. Yes there ARE buyers who can truly afford it despite decreased jobs/wages/prospects/investment value/equity/savings etc... but they're not running out to buy a starter-type home. Prices must revert closer to a house's intrinsic worth for them to make sense to a buyer AND his/her lender.

(To put it another way: wealthy people are not going to buy overpriced homes below their level just to keep the local markets from deflating.)

#2: "To state this another way, as price levels drop on real estate, more potential buyers become interested in purchasing real estate. "

----Demand considerations: there's not the same population of potential buyers looking at the cheaper houses there once was. I believe your idea of "+more interested in purchasing+" is offset by "-less able to purchase due to lack of stability/resources/available financing-".

Downtown Buyer, I can distinctly remember looking at NUMEROUS condos on Beacon Hill for 60-70k in the early nineties, none of the markets (even downtown) in New York, San Fran, or Boston is immune, they will implode like anywhere else. People said the same thing about Tokyo (where there truly is a land shortgage) and that market has been falling on a real basis for 20 plus years...