So we close on a new house in a couple of days. It was another repo. Similar to our current house which lost $245K in value from the peak of the bubble to our purchase, this house lost $243k. It is a nice house with a lot more space. It backs up to the Cleveland National Forest, has access to trails and open space, and has an association pool and fitness center. The house sits about 50-100 feet off of the Lake Elsinore Fault. We are betting that it won't rupture in the next 10-15 years, approximately how long we plan on being in the house. It is a gamble, but so is leaving the money in the stock market.
When I read this article about the effect of interest rates rising, my heart sunk. The author obviously misses anything more than a short term economic perspective. Take for example this statement "For people putting their homes on the market this spring, rising rates may actually be a good thing." Sure, for some people who were selling their house at the exact right place at the exact right time have benefited from the rush of individuals trying to get the $8000 federal tax relief. The value of their house has been held up because of increased demand and possibly short supply. But with a glut of foreclosed homes, joblessness increasing (or maybe staying stable) - leading to more foreclosed homes, and an increase in mortgage interest rates... all I see is an increased housing supply, reduced demand, fewer sales, and an eventual decrease in housing prices. The author even points out that "It's all about affordability. For every 1 percentage point rise in rates, 300,000 to 400,000 would-be buyers are priced out of the market in a given year...For example, taking out a 30-year mortgage for $300,000 at a rate of 5 percent will cost you about $1,600 a month, not including taxes and insurance. But the same monthly payment at a rate of 6 percent will only get you a loan of $270,000." Guess what, we have done little to reduce the number of foreclosures due to joblessness which means we are not really controlling the supply of houses. This means that market forces will push the value of homes down to what people can afford. if interest rates rise, people can afford less. The person who could have bought the house at $300k with a $1600 per month payment when the rate was 5% can still only get qualified for a $1600 per month payment when the rate is 6%. This means that the house that was once $300k is now only worth $270k. This argument is based on some pretty obvious assumptions about buying power, lending rules, demand being held constant, and supply increasing - but I think that they all hold, at least for California.
This could imply that my new house will lose anther 10-15% of its value in the coming 2 years - also what happened with the house we are in now.
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Investing today for tenure later...
3 comments:
It's interesting that mortgage rates have taken a turn upward while the federal discount rate has stayed so close to zero. If borrowing money is cheap but not to spend it on houses, then we should expect to see price bubbles in other markets (and oil is well on its way back to $100/barrel). I think it is because the housing market the biggest problem two years ago that banks are raising mortgage rates to keep money out of that market. But what's weird is they're just building up their reserves, possibly because the Fed now pays interest on reserves. I guess if you don't know who's going to pay you back, you lend to the organization that can always print whatever they owe you.
That was pretty lame of me to write that whole long comment and forget to congratulate you on your new house. Sorry.
congrats on the new house! can't wait to see it. is it bigger? i know your house now is tiny, so hopefully you can stretch out a little bit in your new one.
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