bostonbubble.com

[Greater Bos]

We all agree home prices needs to come down may be another 20 to 30 %. Is it possible to do more on interest rate? Gov is lending money with almost 0% to bank so is bank making about 4-5% on it? Why not gove should lend it to ppl directly. Bank is making money by doing almost nothing they get money free and lending us with 5%. Bank need to raise their money on their on. not like get it free and lend it with 5%.
Is there any way to brong it down to 2% if not then why not?

[john p]

This is a government of elites. Elites believe in top down and not bottom up policy.

It's like trickle down Entitlement; kind of bizarre for Democrats who pose as trying to help the poor.

I mean even George W. Bush realized that the best Stimulus was tax cuts or sending a check to people because it was direct to the individual and not through the pork addicted government.

[Greater Bos]

[Kaidran]

It is a backdoor bailout to allow the banks to recapitalize by increasing profits in the near future to cover inevitable losses not yet recorded on their books. The rates have steadily dropped over the last few months, however with no change to the base fed rate. What will happen next is anyone's guess but if the rates go up prices will come down to compensate unless wages start going up.

[GenXer]

This is exactly why nobody should be buying, now, or ever, as long as the interest rate is unrealistic. As long as the banks make most of their money by doing this, they don't need to offer higher rates on CDs and money markets, which in turn keeps savers from getting what their money is worth. And of course, the government is still trying to reinflate the bubble. Let the interest rate rise, and wait a couple of years. The fruit will fall from the tree when ripe.

[Xenos]

[quote="GenXer"]This is exactly why nobody should be buying, now, or ever, as long as the interest rate is unrealistic. As long as the banks make most of their money by doing this, they don't need to offer higher rates on CDs and money markets, which in turn keeps savers from getting what their money is worth. And of course, the government is still trying to reinflate the bubble. Let the interest rate rise, and wait a couple of years. The fruit will fall from the tree when ripe.[/quote]

What is a realistic interest rate? Based on my recollection of the pre-bubble economy, 8% was good, 10% was getting expensive, and 12% meant you did not buy a house or refinance unless you really had to. I have pretty much no economics background, but it seems to me that if that range is the mean to which we will someday return, housing is pretty drastically overpriced. I don't think I will be brave enough to buy a house until we are back in that range. If the market clears inventory when financing is that expensive, then it must be pretty fairly priced.

[CL]

I have said it quite a couple times already, but I still cannot see a very clearly relationship between increase in mortgage rate and subsequent drop in house price. Of course, logic dictates that rate increase -> lower affordability -> fewer buyers -> lower price, but I cannot see it from empirical evidence. GenXer if you can show me how to get to your conclusion that will be great.

Also remember, housing market is quite unique in that since it is highly inefficient as a financial market (due to high transaction price, non-standard products in housing stocks, etc), the market can stay out of equilibrium for a long time. Which means one scenario with increase rate is that fewer buyers, fewer sellers, transaction well down, and not much selection in the market.

The real buyer heaven is the time when there are very few buyers but tons of sellers. I can see rate increase reduce # buyer, cannot see how it bump up # seller.

[mpr]

The bank isn't making 5%: Mortgage rates now are at about 4.5%
while the 10 year bond to which they tend to be linked is about 2.5%.
The 0-.25% is for short term money from the Fed. Although banks can
borrow short and lend long this is not free money, since if interest rates
rise the value of those bonds will fall. (If you dont believe this feel free to
borrow short and buy bonds).

In any case most of the banks now sell the mortgages they originate to
Fannie/Freddie with a resulting rate something like the 10 year treasury
(I dont know this for sure, so if someone knows please correct me).
In fact maybe its higher since this bonds comes with an option for the
borrower to prepay at any time.

In that case they're probably making about 2% on the sale. A good way to
see whether this is excessive is probably just to look at the historical
difference between mortgage rates and the 10 year. I'm not sure if that
difference is particularly low or high now but I dont think its absurdly out
of whack.

(I'm also confused by the OP's logic. How would bringing rates down further
drive down prices ?).

[Xenos]

[quote="CL"]... Of course, logic dictates that rate increase -> lower affordability -> fewer buyers -> lower price, but I cannot see it from empirical evidence. GenXer if you can show me how to get to your conclusion that will be great..[/quote]

An historical analysis gets you there, because reduced rates (due to Greenspan and securitization, which made those reduced rates available to a wider class of buyers) lead to the bubble. Maybe that is not provable, or just not proven in this case, to a scientific standard of certainty.

Can we perhaps look to the correlation of house prices to the rapid increase in rates in the late 70s? Since the high rates were for only a couple years p[erhaps we just saw a freezing of the real estate market, but I thought the early 80s real estate market, feeling the long term effect of those high rates, was a pretty cheap one.

What sort of empirical evidence is necessary for you?

[Kaidran]

I went to the Redfin buyers class last year. During the mortgage section they said that the profit margins are currently higher than they were during the bubble. I know it is second hand information but I'd be inclined to trust them more than most.

[CL]

Actually the bank makes less than 1%. The prevailing rate to compare to is the fannie/freddie rate that all banks sell the mortgage to, which is consistently 50-75bps lower than market mortgage rate.

[GenXer]

[CL]

I am not questioning the logic of high interest rate should lead to low housing price, but I cannot come up with how strong the relationship really is.

I previously ran test on rate of change of interest rate vs a lagged change of home price (case shiller index). I cannot see a strong relationship. Anyone who can present reasonable analysis, please post.

[admin]

[GenXer]

This is a very complex relationship, not very easily described by comparing two charts. Raising rates by themselves may not cause house prices to fall, at least not right away. There may be other factors in play here.

http://mortgage-x.com/trends.htm
http://www.ritholtz.com/blog/wp-content/uploads/2008/12/case-shiller-chart-updated.png

Looking at the interest rates, the highest rates corresponed to 1981-1983 recession, which corresponded to a dip in house values according to Case Schiller index. In late 80s, the rate was lowered to 9%, and that corresponded to another peak in the late 80s early 90s. The housing prices actually fell in the 90s, even as the rate was lowered. So we know that house prices can fall in response to other conditions as well. The problem with my argument is that from the 60s to 80s, even as the rates were increased from 6% and up, the prices stayed more or less steady. The only explanation I would have is that people could actually afford the houses they were in, and that less people owned houses, and the economy was doing well so unemployment was low. We'd need a lot of charts to overlay on top of each other. Unemployment is one of the important ones. There may be pretty complex feedbacks here, so CL is right that there is no causal relationship. But my argument is that under certain circumstances, i.e. high unemployment, bad economy, etc., higher interest rates may CONTRIBUTE to rising house prices. They may not. So I want to withdraw my assertion that rising rates necessarily cause price increases. They may not. But then again, they may with a big delay, so in effect, we don't know whether they do or not. However, a 10 year delay is quite a lot, and many other factors may have contributed.[/url]