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Back to a normal market? Don't bet on it

Posted by Scott Van Voorhis August 16, 2012 07:40 AM

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The real estate market is finally getting back to normal after a downturn in prices and sales on par with the 1930s.

That's been the mantra lately of real estate market watchers.

Frankly, I've been guilty of spouting something like that.

But that does not take into account the massive backstop to home prices the federal government and even more importantly the Federal Reserve are providing right now.

Today's bizarrely low interest rates are not some economic freak of nature, but rather the product of the Fed's multitrillion-dollar monetary manipulations.

And rock bottom interest rates, a key prop that prevented housing prices from completely falling through the floor, are now subsidizing the recovery as well.

Simply put, you can buy a lot more house - or more accurately you can spend a lot more money buying a house - with a 3.5 percent interest rate than with a 6.5 percent interest rate.

Roughly, each percentage point equals 10 percent of your monthly payment. So the difference between a 3.5 percent mortgage rate and a 6.5 percent rate - which just a few years ago would not have seemed all that bad - is huge. It means buyers can pay roughly 20 percent to 30 percent more than they ordinarily would in a normal rate environment.

The broker and NAR types will say this is great, that it's all gravy, that it means you can buy more house than you would have been able to afford otherwise.

In reality, especially in an already pricey area like Greater Boston where the choice of homes is limited, it simply helps keep prices high, with few real gains for buyers.

That's my take? What's yours?

This blog is not written or edited by Boston.com or the Boston Globe.
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About boston real estate now
Scott Van Voorhis is a freelance writer who specializes in real estate and business issues.

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