WatchPlease stop repeating the myth that rising interest rates will cause the price of real estate to fall. That's not what happens. An article in Businessweek:
http://www.businessweek.com/lifestyle/content/dec2009/bw20091229_199828.htm
"When comparing this data to the interest rate data I provided in an earlier article, I found that housing prices did not fall in the years when interest rates were rising. In fact, housing prices generally rose when interest rates climbed. When reviewing the numbers adjusted for inflation, housing prices still rose when interest rates made their steepest climbs and even fell when interest rates retracted. The most obvious examples were the years from 1975 through 1983."
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I like how you guys are pointing to Data that is over 5 months old, as solid proof the bottom was in 09.
Last I heard, last month was the worst foreclosure report on record.
I don't know what cup you guys are drinking from, but the Tea leaves are lying.
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Tenouncetrout says
Actually the data I was referencing is only about 2 weeks old. It was the Case-Shiller March 31st report I believe and it's on their site.
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http://news.yahoo.com/s/ap/20100415/ap_on_bi_ge/us_foreclosure_rates?source=patrick.net
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iwog says
The index reflects data collected with 2 month delay. So that was through January. On top of that it's 3 month smoothed, which means data from Nov/Dec 2009 are weighted similarly. So really the index as released most reflects the state of the housing market in mid-December... 4 months ago.
tatupu70 says
I'll buy that. (but not a house right now TYVM). It's certainly more complicated than that, just as interest rates themselves have several complex factors. In the 70's inflation expectations drove housing prices and interest rates. The same will not be true today.
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Exactly correct.
Iwog -- I see where you're trying to go with this, but with all due respect, it does not serve you well if one week you vehemently dismiss the Case-Shiller Index as a fraud, only to cite it as supporting evidence in your argument the following week.
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Austinhousingbubble says
Actually it makes my case stronger.
My assertion is that the Case-Shiller index is GROSSLY underestimating home appreciation due to their model. Therefore Case-Shiller data indicating home values have increased since early 2009 is probably understated.
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Thanks to those who understand my point. I have never argued that rising interest rates somehow causes the price of housing to increase as well. I am simply pointing out that they VERY commonly argued point of "rising interest rates will depress home values" is almost never true.
If it hasn't been true in the past, why would it be true this time?
Zlxr: 2 income families were pretty much the norm from the 1980's onward. Furthermore single parent families have increased DRAMATICALLY in the last two decades. I believe over 50% of America's Children now live in a home with a single parent, usually the mother.
Regarding all the wage arguments, I'll simply submit AGAIN why people think things are worse now than in the 1930s? The Great Depression spawned a 4-year bear market in real estate. How is a recession more mild than the one in 1983 going to extend a 4.3 year bear market into a 6 or 8 year bear market? I simply don't understand the logic.
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1. With the exception of Florida, the great depression was not proceeded by such a huge real estate bubble. Florida land prices didn't recover from the 1920's bubble until this bubble, almost 90 years later.
2. Mortgages were not common going into the great depression, and downpayments were huge compared to today's bubble buyers. More levearge = more to de-leverage.
3. Home ownership was not so pervasive in the 1920's, something like 50%; compared to 65% going into this correction.
4. You don't judge a correction by "how long" it is; so claiming 4 years is enough is silly; You judge a correction by the price change, and clearly many believe home prices compared to rents, home prices compared to salaries, etc. are still higher than the longterm trendline.
5. Unprecedented government programs to try to stop the housing price correction: MBS purchases by FED, attempted mortgage workouts, first time buyer's credits etc. have likely delayed our correction. So, we haven't had 4 years of corrections, we've had 2 years followed by a pause. Tune in this fall for the sequel, as these programs end and real market factors reassert themselves.
6. The evidence is mounting: BofA announces an anticipated increase of their foreclosures by 500% this year, as homeowners fall out of attempted modification programs. [more distressed supply coming] Applications for purchase mortgages declined by 9% last month, so don't look for a big rush of buyers.
Keep iwogging your tongue, talk yourself blue in the face, the evidence will pile up on you by the end of this year. I'll be totally shocked if you still post here under this name IWOG!
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There are periods in history where mortgage rates went down and prices went up, correct? ~2000-2005, for example. Recently mortgage rates have dropped and prices have stabilized or have even gone up in 2009-2010. So there are points in history where your theory is not true. ~2005-2009 was kind of up in the air because of the loose lending. So instead of going back to the 1930's or 1970's, why not use recent historical data?
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camping says
Recent history from about 2000 to 2003 is actually the only exception I can find. Most agree that reckless actions by Greenspan combined with deregulation caused the real estate bubble to inflate out of control.
I consider 125% financing to people without a job to be ABNORMAL while I consider most of history until about the year 2000 to be NORMAL market conditions. We are now returning to normal market conditions. Real Estate and interest rates should rise and fall together like they always have done.
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camping says
I think you're missing the point. At least what I was/am trying to say. It's certainly true that interest rates may move opposite of home prices, just as they might move in tandem with them. What the history has shown is that there really is a very low correlation between interest rates and home prices. So, despite all the posters saying once interest rates go up, home prices will fall like a rock--the data says different. Prices may go down, or they may go up. We just don't know.
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azrob00 says
1. The point is when did the recovery START and when did prices start increasing again. It was 1933.
2. Mortgages were EXTREMELY common in the 1920's, in fact "It's a Wonderful Life" starring James Stewart was all about an entire town being built with mortgages before the Depression.
3. I fail to see how home ownership changing from 50% to 65% is relevant to anything. I could probably make the argument that greater home ownership means the bear market will be shorter.
4. I always judge a correction by how long it is. Nasdaq bubble, oil bubble, Platinum bubble, Nikkei bubble, 1987 stock market crash, 1974 stock market crash, 1992 real estate bear market, 1980 real estate "bear market", and the Great Depression all reached bottom in less than 4 years. I cannot think of one single example in the last 100 years where a bear market lasted longer than 4 years. Can you?
5. Unprecedented government programs are exactly why real estate has reached bottom. The transfer of wealth occurring by both spending and the printing press are permanent.
6. Bank of America announced a 600% increase in foreclosures on existing delinquencies along with principle reduction of up to 30%. The Foreclosure rate is actually dropping. 349,000 in December 2009, 308,000 in February 2010 nationally.
7. In early 2008 I was told by many people on this board that I was going broke and that my investments would send me into bankruptcy. I'm still here while some who made that prediction are now long gone.
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tatupu70 says
That may be your point, but that doesn't seem to be the point of the original quote. "In fact, housing prices generally rose when interest rates climbed."
I personally don't see how they are unrelated, particularly in parts of the bay area where we're talking $500k+ mortgages. A few ticks up or down results in a big change.
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iwog says
I don't think 125% financing occurred widespread until about 2005-2007 which is why I said that time period was up in the air. 2000-2003 did not have much 125% financing.
I'm not sure what evidence there is to suggest that we are returning to normal market conditions. Fed giving $8k, CA beginning to give $10k, Fed buying MBS to drive down rates. So far not very normal. FHA is being used more than it ever has been in history. There is potentially a shadow inventory - not historically normal. Many of the 125% financing that you criticized above is still pending and will reset/recast starting now continuing for many years. Many banks are offering IO loans or other modifications for those in trouble. HAMP still exists. Mortgage cram-downs are becoming more of a possibility. I'm sure I left out some pieces that do not make this a "normal market." So how do you reach the conclusion that this is a "normal market?"
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iwog says
Japanese real estate.
Florida real estate (in the 20's)
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E-man says
CA only has a less than a third the population density that Japan has. There is plenty of land in CA to build. Not so much in Japan.
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camping says
That's why I trust data over intuition...
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Perhaps I'm missing something but I think quantity has a bearing. I don't think you can draw a graph with a straight line on it and say "We are here and when this happens we'll be here."
I think the amount of the increase and how fast it's implemented would make a huge difference as to wether or not it would affect house prices.
Also I think we're looking at secondary market forces and claiming them to be primary. Interest rates will not climb until inflation of some other primary market force causes the Fed to raise the rate. It's more likely that THIS market force will act upon house prices and not a reactionary action the Fed uses to slow the economy down.
So if you said: "When the economy turns around... as a result house prices will rise. To slow a rising economy the Fed traditionally raises rates to keep rapid growth in check." That may then become a true statement.
However. I disagree. I don't think that this time house prices will rise "along with interest rates". I have been wrong in the past and I could be wrong again. Here's how...
At the moment the stock market is and has been regaining lost ground. Now is this a market recovering or is it another mini bubble? If it is another mini bubble... There is a chance that houses could bubble again (small) as the die-hards jump back in. Some call it a "W". I see some signs of that, where buyers/investors are all too ready to jump back in on what they believe to be the bottom. ANYONE who knows real estate knows... there shouldn't bean instant rebound, more a gradual slowing of the decline, then a long flat period and then perhaps a pickup.
Then again who knows? Let's increase the tax incentive, or extend it. How about forgiveness of tax debt? Let's make it easier for foreign investors to buy US property. How about the tax payers buy a few car companies? Let's force banks to lower the mortgages on their customers. Let's open the discount window forever? Hey did I just see a pig fly by?
See what I mean? All bets are off. All these other forces are now in play when they weren't before. It's my opinion that we've become a consumer nation, and it's our spending that drives the economy. So what will the forces that be do to convince us we're wealthy again?
Sure they may convince us our houses are worth more, but if you don't have a job... you basically can't afford the mortgage on a house that's now worth more. I'm interested to see how this plays out but anyone with a bold prediction is asking for trouble.
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tatupu70 says
To what data are you referring? And this isn't intuition - it's called logic. If something becomes more expensive, fewer people are able to afford it unless the purchasing power of the purchasers increases. That's why prices typically increase during times of higher rates, because wage inflation is also happening concurrently. 2000-2005 were years without wage inflation yet prices went up because of decreasing mortgage rates. Is there any historical data where prices and mortgage rates went up where there WASN'T wage inflation to support the increases? If not, what makes you think that we're going to have any meaningful wage inflation in the next few years? Is it the 9.x% unemployment rate, the continuous exporting of jobs or some other anti-logic that will cause this wage inflation?
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camping says
Historic housing prices and interest rates.
camping says
Probably not.
camping says
What makes you think interest rates will go up if we have 9.x% unemployment?
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tatupu70 says
Well, that leaves out a lot of data.
camping says
tatupu70 says
Ok.
camping says
tatupu70 says
The fact that mortgage rates have been artificially depressed by the Fed for the past year+. If mortgage rates were naturally going to go down to 5% while our economy tanked, then why did the Fed spend $1.25T buying them?
From what I've heard, there's a general consensus that mortgage rates will rise to above 6% by the end of this year and that unemployment will remain stubbornly high. It seems you agree that house price inflation won't occur without wage inflation (based on historical data or lack thereof), and there won't be wage inflation with high unemployment. Therefore, if unemployment remains high as expected, yet mortgage rates also rise, the next logical step is that prices will fall.
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camping says
There's a lot of ifs there. Under your hypothetical scenario, I'd agree that prices would probably fall. I don't agree that interest rates will necessarily rise to 6% if unemployment remains stubbornly high, however.
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tatupu70 says
Actually, it was just one "if" in the stated hypo. Hard to do any sort of hypo without an "if" considering that's pretty much the definition of a hypo.
The unemployment rate isn't going anywhere soon. Mortgage rates were up at 8% during the 2000 recession; I'm not sure why they can't make it to 6% during this recession (that ended).
Well, then what do you think is going to happen over the next 2 years?
Unemployment is going to drop significantly?
Mortgage rates are going to stay at 5%?
Wage inflation is going to occur?
My view is that unemployment is going to stay high, rates are going to rise to at least 6% by EOY 2010 and wages are going to be flat. This is based on the fact that millions of jobs were lost over the past few years and the current hiring numbers are still unimpressive, Fed getting out of MBS and the rest of the world not bailing us out, wages continue to be flat due to high unemployment. Where's your logic/evidence to the contrary?
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I'm no good at predicting the future of the economy... If we're talking about 2 years out, I'd guess that unemployment will drop a couple of points and that wages will increase. Interest rates will rise a bit--I think 6% is a reasonable guess.
My view is while each recession has its own special causes and concerns, the economy as a whole acts similarly during recovery. If you look at business articles from the last couple of recessions they scream jobless recovery, outsourced manufacturing, budget deficit, etc., but 2 years later things were somehow back to being OK.
Yes, this time it might be different. Like I said, I'm no good at predicting these things...
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The pendulum doesn't swing one way only to swing back and stop in the middle. Asset bubbles typically over correct.
There will be no wage/salary inflation for the biggest percentage of American workers. All data points to things trending in the opposite direction, but for some radical shift in policy/trade laws.
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iwog says
Japan 1992-2003.
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Tech stocks, USA... ex NASDAQ 2000 to today, 11 years and counting.
Japanese stocks a couple of decades
Japanes land, ditto.
Gold, 1980 peak $850 an ounce... took 27 years to come back.
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tatupu70 says
The 1991 peace-dividend, RTC recession sucked until 1995-1999. Dotcom got the ball rolling in the bay area again, and from 1995 to 1999 Greenspan was allowing money supply to really flow.
2001 recession never ended, really. We just had the mother of all housing bubbles to pull us out of it temporary-like.
Zlxr's above comment echoes my thinking exactly.
I'd add that the median baby boomer was turning 20 in 1975, putting pressure on household formation.
We got trade flows with China and OPEC taking wealth out of the economy. NAFTA thanks to Clinton.
I just don't see any upside from here.
The existing stock of housing has a cost of production of $200/mo or so. That's the baseline that housing providers are facing, the price the market is seeking as the middle-class and below wage base is beaten down and has to make ends meet.
We bid up the cost of housing to where it is now, and we can and will bid it down.
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azrob00 says
Nailed it. Only thing you forgot to mention is that getting business news from Businessweek is like getting real estate advise from a realtor - always useless and usually counter productive. Businessweek covers are famous as sentiment indicators.
Prices rose despite interest rate changes because new loans kept getting written to people who believed in appreciation. The credit bubble is at least thirty years old. Once Businessweek has "The Death of Real Estate" on the cover it will be time to buy.
I'm kind of glad that there are still so many people who don't have a clue. This means a bigger drop as these people panic sell/get margin called next time we head south. Particularly love this being tagged as hypothetical: "millions of foreclosures still coming and a moribund job market".
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E-man says
Slapping random charts together without any explanation is in?! No one told me...California is losing US citizens and gaining illegal immigrants with no skills. Is that the point you were trying to get across or was it some correlation between California population and the Irish RE bubble?
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@ azrob,
You made a compelling case. I don't disagree, but I think we're in much better shape comparing to many Europe countries and even China. Their RE bubbles are much bigger than us. With that said, I believe the dollar should gain its value against the Euro.
When it comes to RE investing, I believe we have different philosophy. Iwog and I acquired properties at about 50 to 65% below the peak value (2006), and all of these properties do cashflow. If rent were to drop 30-35% from here, we still don't have a negative cashflow issue. I would say that's a pretty nice cushion. Also, the properties we acquired tend to be in the lower-tier of SF Bay Area. As demonstrated on the C-S graph below, the lower-tier has corrected more significant than the mid- and high-tiers, and it tends to outperform during good years. Personally, I don't think we have much room to fall on the lower-tier, some room on the mid-tier, and quite a bit of room on the high-tier. Of course I could be dead wrong, but that's the bet that I am willing to take.
I am not smart enough to know when we'll hit bottom in the RE market. Therefore, my strategy is to keep on acquiring 2 to 3 properties each year as long as it would have positive cashflow.
Of course I know banks are holding back on its "shadow inventory" as shown on the chart below. Look at how out of whack the actual REO's compared to 90+ day late loans and the foreclosure filings.
I know this RE bubble is much bigger than the S & L crisis in the late 80's and early 90's, but I let the numbers guide me. If I can acquire any property in San Jose or Milpitas having a GRM of 9 after rehabbed or greater, I buy. I don't mind the RE market goes down some or sideway for the next 5 years, but I would likely be a happy man looking back in 10 to 15 years from today and say "God, I am so glad I bought RE back then." So wish me luck.
Happy Investing!
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I'm not generally one to cite movies as evidence, but wasn't that the entire point of "It's a Wonderful Life"? That regular people like the restaurant owner, the taxi driver, and the cop were buying homes by borrowing through the Bailey Building and Loan?
The movie was made in 1946 so the Great Depression was still fresh on everyone's mind.
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Zlxr says
I would have to disagree with you that the rental market would drop 35 to 50 percent from this point. Maybe 10%? However, that wouldn't impact me since most of my rentals are about 10% below current market rate, and I am proud to say that my properties are THE BEST in the neighborhood. I dropped $30k to $40k on renovation on all of my units before renting them out. The neighbors and tenants love me. The competing landlords hate me. I guess that's why I have a waiting list on all of my current and future rentals :-)
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Kudos to iwog for posting this observation which is definitely at odds with much of what we hear. Interest rates are driven up when there is inflation. When there is inflation, the price of nearly everything goes up, including wages and housing prices.
But interest rates are also tied to risk. US treasury notes have traditionally been able to pay lower interest rates than other countries who float debt because we were considered more stable financially.. a safe harbor for money. Countries like Greece and Argentina have to pay higher interest rates on their debt because they are riskier bets. With current US deficits http://ur.lc/fkx and reckless spending, the demand for US debt is declining, and we will have to either fix our financial problems or pay higher interest rates to attract investors. I do not believe that China and Japan will continue to fund our current financial mess at the pace they've done in the past. To pick up the slack, the Feds are buying our own debt http://ur.lc/iqw which is kicking the can down the road for the day(s) of reckoning.
Under this scenario in which demand for US debt is declining, interest rates would have to rise in order to attract investors. This rise in interest rates could occur while we enter into a deflationary period with further drops in housing and other items as interest rates reduce demand.
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ZippyDDoodah says
Interesting point, but what rate are mortgages tied to? LIBOR? I'm not sure that US Treasury yields would necessarily affect mortgage rates...
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taputu: Mortgage rates are tied to MBS security rates, particularly 10 year rates. At no time EVER have 10 year MBS's traded less than 10 year US treasuries. So to answer your question, if 10 year treasuries increase in yield, you can rest assured mortgages will too.
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It's all risk/reward. If US T-Bill interest rates rose to say 9%, banks and other lenders would have to weigh their options whether to buy T-bills or to loan out their money for mortgages. Mortgage rates would have to rise in order to compete for that money, assuming that US treasure notes are equal to or more creditworthy than the risk of a mortgage loan.
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azrob--
I get what you are saying, but I guess I'd say that if the US T-Bill rates rost because of unsystematic risk--that is the chances of the US defaulting--instead of systematic risk that affects all assets, then I'd say we're in uncharted territory. I see no reason why that would affect the rate that a prime borrower would receive.
Zippy--
And as to the risk/reward--if that were to happen, wouldn't it imply that a prime borrower would be less risky than the government?
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With another rate cut liekly, and a general concern with liquidity and economic health over inflation, I don't see 30 year mortgage rates at 5%.The real estate market is very regional, and in some case almost local. If a house in a trendy San Diego neighborhood went up 100% in 5 years, then sure a 20% decline is really not that much, unless you happened to buy at the market peak. Most major markets are already down 10%, so another 5-10% decline might be possible.Setting aside the speculative actions that effected some markets, real estate is generally related to unemployment rates, job creation, and population growth.So areas like Charlotte, Dallas, Chicago, etc will not see a 8-10 years of flat prices. Could prices in Detriot be flat for 10 years, sure. But that is related to problems in the auto industry.a>
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Wow, a thread dragged out of the archives from over two years ago....