bostonbubble.com

[john p]

I have never seen this sort of spike in interest rates. This is a tough month and will absolutely affect home prices.

http://www.bankrate.com/brm/graphs/graph_trend.asp?product=4&prodtype=M

[john p]

http://money.cnn.com/2007/06/14/real_estate/mortgage_rates/index.htm?cnn=yes

[eric h]

It should indeed affect home prices, and I would imagine that the timing couldn't be much worse for sellers -- new listings have slowed with the wind-down of the spring market (at least in the communities we're looking to buy in). This spike knocks about $20,000 off the top of our price range. And rates will probably rise some more. As I see it, rising rates are just as much (or even more) a problem for the seller than the buyer. The buyer still has X amount he or she can spend, whereas many (though of course not all) sellers are still basking in vast, bubble-driven value increases from the first part of this decade. But they're gonna bask less and less, it would seem...

[john p]

Depending on if you're a first time buyer or not, the competition of others trading a property to buy the one you might be looking at just got smaller if they might have to walk away from a much lower interest rate i.e. why would someone sell their place if they had a 5 percent rate to go to a 6.5 percent rate?

[Divadkire]

Bad timing is an understatement for sellers.

This will affect the size of the mortgage I can handle but it should also disqualify many more potential buyers and cause the prices to go lower.

I am waiting until next spring and then I might wait another year.

Don't bite off more than you can chew and have the largest possible downpayment.

[Condo]

Wait a few weeks, rates will ease off the gas peddle this time around. If someone is worried about a .25 pt hike in their rate...they should not be buying. FED may raise the FFR in the next session, in part, to ease inflation.

[Guest]

[john p]

Condo:

You know how it goes, that .375 of a point increase ends up being $20k to some, $80k to others. And then think about how hypersensitive you get when you're around your sweet spot. Even if you can only afford a Dodge Neon, you're hoping to get those 17 inch wheels and maybe the "sport" package.

If say someone lives in a condo and wants to upgrade to a cooler condo, let's say they bought a $350k condo with $50k down and got a rate at say 4.5% for $300k. Now, they want to sell their condo which is say worth $450k and step into a $650k condo, they need to pay off the realtor who get's 3-5%. After closing costs and realtor fees they clear about $100k, so they put down $150k on the $650k and they have a $500k mortgage. They do a base note for $417k at say 6.5%, and does a piggy-back for the balance, $83k at prime rate, say 8.5%.

When the dust settles, you're living in your condo paying about $1900 per month mortgage, taxes, insurance and the upgrade will cost $3500 per month. That's a big, big difference in your ability to save and become wealthy in the long run. The piggy-back second note causes some interest rate pain as well as the big delta of interest rate on the base loan. It makes it tough to walk away from that low cost of capital. Is the upgrade worth it? Then do the check "what do you get for $650k versus $450k? I'd have to walk in and out of bunch of condos in the market to determine this.... I think that there might be some gaps in quality where the forced curve affect of affordability arrays the market around the concentration of what the market can pay. Sometimes there is a big gap in quality in just $30k because it is a sparse area in buyer's affordability. In these sweet spots, it may be worth it to pay for the extra money because you get a big jump in quality, in others; it's not worth buying because you pay so much more for so little extra quality.

Think about cars. Most cars cost between $15k to $25k. Why, because this is the common range of what people can afford. The difference between a $130k car and a $120k car might not be that noticeable as the $10k jump between $15 and $20k. This marginal benefit has a price 3D perspective, a quality value bulge that diminishes and increases around the affordability of buyers and the available array of homes. The interest rate is eating into the affordability so as the bulge becomes less visible because of he shrinking supply of buyers due to affordability, you'll see the remaining topography beneath, the available homes on the market. The more homes exposed beneath, increased supply need to get under the cover of the affordability umbrella so they move to the buyers. If affordability is decreasing, the first sellers to adjust will be better off than those that will have to keep chasing the tide that is going out. The affordability contour is different in different income strata so you'll see some sandbars and inlets and the tide line will go in and out, but the average, the median is going down right now. Because younger buyers don't have that $100k extra from the prior sale, and the interest rates are high, the tide is going out.

What you're noticing is like the commercial for the Lexus that is driving across the ice and the ice is breaking up behind it. Those people are trying to floor it so that they don't plunge into the water. Some make it to solid ground, kind of like the "fake it till you make it" approach where you don't have the fundamentals, the ground under you and you just move forward despite any lack of ability. This is the whole economic branding concept of companies growing through acquisition without the ability to manage the company they end up with or the work they win through selling the brand. Many are living in the wake of this "me" generation. Hell, I met this guy on the train who was part of the St. Elmo's generation (he's about 43). He tells me how cheap college was, how cheap he bought his first house for, and to add insult to injury, his job is selling overpriced consolidation loans to college students, and he hopes to get them in hock with that, mortgage, kid's college, and then reverse mortgage. What a country for that guy, huh? Because these guys have only seen green lights, they might not have the discipline to self regulate and they could end up getting themselves overcommitted by buying a $950k home that isn't much better than a $650k home and the market goes soft on them...

Condo, and you’re point about the interest, is kind of like the advice about not losing a car over the price of the floor mats. I don’t think it is just about the floor mats, it’s about the value of the US dollar and how imported cars just got really expensive and gas got really expensive so the SUV just cost me like an extra $50 bucks a months, stuff like that…

[Divadkire]

Great previous post, puts the trading up proposition into perspective.

That will keep those folks on the sideline and people in the Over $600K price in a much tougher bind. Not only do they have to deal with skeptical buyers on the sideline but potential buyers are not going to be so inclined to move up if it is going to cost them 2 lbs of flesh and their first born son.
_________________
Divadkire

[john p]

I'm just jealous of Condo, he's going to by styling and profiling in the South End and I need a way to vent. I'm hoping to get an invite to his house warming party but I think he might think I'm one of those types that double dip the chip (which I'm not)

[john p]

It's Friday!

http://plutoniumblond.files.wordpress.com/2006/09/talladega_060920062845935_wideweb__300x402.jpg

[admin]

It looks like you beat Bloomberg to the punch, John P:

Mortgage Rate Rise Pushes U.S. Housing, Economy to "Blood Bath"
http://www.bloomberg.com/apps/news?pid=20601087&sid=akV2sasSGUY8&refer=home

- admin

[john p]

Hey, even a blind squirrel can find a nut.

[admin]

[mgg]

A 1% increase in rates corresponds to a 10% increase in price. So if rates just went up 0.5%, prices need to come down 5% to still be affordable to the same people.

The person who said if you worry about a small increase in rates you shouldn't be buying is out of his mind. For most people it is the largest purchase they will ever make and that 0.5% increase when buying an average MA house of $350k comes out to $18k additional money and that puts a lot of places right out of their price range unless prices come down to compensate. If a house is listed for $380 and you are planning on offerring $350, now you have to offer $330 and the seller is far less likely to accept it.

So this 0.5% increase ALONE should cause a 5% decrease in prices just as the decrease in rates from 2001 to 2004 caused a corresponding increase in prices. The problem is that sellers who bought at those inflated prices because of low rates during that time period are going to get screwed as they try to sell now.