patrick.net

Not if lending standards get relaxed again. It's bennie's toy box and he decides who plays with the toys.

Interest rates will only rise if inflation rises. Inflation will cause higher prices.

There is ample historical data on the subject.

If rates hit 9%, I would bet every cent I have right now that home pries would fall.

It would not only take many of the investors OUT of real estate (pretty much half of the demand today), it would also have a huge effect on monthly payment for traditional buyers.

Of course, if FHA started offering 0 down, $925,000 loans for anyone with at least a 500 FICO, then all bets are off.

Goran_K says

Of course, if FHA started offering 0 down, $925,000 loans for anyone with at least a 500 FICO, then all bets are off.

Bernake might just do that and they might bring back no document loans. Just put zero down, get a "free" car when you buy, add closing costs to the 925k mortgage and make it interest only for the first five years!

Kevin says

Interest rates will only rise if inflation rises. Inflation will cause higher prices.

There is ample historical data on the subject.

The mistake most people make there is assuming there is just one inflation rate.

Different parts of the economy inflate at different rates. We lived through a period of very bad inflation in house prices. That was the housing bubble.

Salary inflation remained low all that time though. House prices were able to rise only because lending standards were lowered, like taxee points out.

This might be helpful

http://seekingalpha.com/article/1066721-6-scary-charts-on-the-hyperinflationary-cliff

Goran_K says

If rates hit 9%, I would bet every cent I have right now that home pries would fall.

I'll take that bet.

The mistake most people make there is assuming there is just one inflation rate.

Different parts of the economy inflate at different rates. We lived through a period of very bad inflation in house prices. That was the housing bubble.

Salary inflation remained low all that time though. House prices were able to rise only because lending standards were lowered, like taxee points out.

The price of houses went way up, but the cost of housing did not go up nearly as much. Negative amortization loans, interest-only, etc. made those ridiculous prices possible. For many people, buying a home was much cheaper than it had been in years past, despite constant or even slightly higher interest rates.

In 2000, a 30 year FRM was about 8.5%. In 2007 an interest-only ARM was going for 5.5%..

In 2000, median home price was $170,000. The payment on that 30 year FRM would be $1307.

In 2007, median home price was $247,900. The interest-only payment on that was $1136.

You can easily see this by looking at rents: Average of $602 in 2000, average of $802 in 2008. CPI would predict that 2008 rent at $745, which means that rents only increased at a rate less than 1% higher annualized than CPI.

Overall inflation isn't going to move in the opposite direction of interest rates, period. If inflation becomes a problem, the banks (private and central alike) will do everything that they can to raise rates. Otherwise they'll lose their asses (of course I'll borrow $1M today and pay you back $900k next year!)

The opposite is equally true; if inflation is very low (or negative), interest rates will drop; otherwise they will lose their asses (of course I'll deposit $1M today and withdraw $1.1M next year!)

Anyway, I'll bet anybody $100,000 in gold bullion that there won't be any significant increase in interest rates or inflation (I'd consider 2% 'significant') over the next 2 years.

I'd peg the risk of hyperinflation at zero. Betting on hyperinflation is a fantastic way to lose your ass, and pretending that there's some way to predict it happening is pure bullshit designed to sell books and newsletters.

There are 50-60 examples of hyperinflation in recorded human history. You can identify every single one and see that they all have the same thing in common: Not a single one was the result of long-term trends in the finances of a wealthy, stable society. Post-war debts owed in gold, currency system changes following regime collapse, and wars in general cause it.

In other words, in most places that have experienced hyperinflation, the inflation itself was a symptom of a societal collapse, not the cause of it.

There's nothing about the present-day united states that is likely to cause societal collapse. Another recession? You betcha'. But we aren't fucking weimar germany.

I really do hope you guys aren't making any real financial decisions on the assumption of hyperinflation, and this is just bullshitting. I can think of worse ways to plan your finances, but not many.

lostand confused says

and make it interest only for the first five years

And why would they even bother paying that when they can get 3 years of free rent instead?