If someone locks in a 30 year fixed rate loan at say 6.25% how can they no longer afford it if rates go up?
You are right, daniel_m, I was just trying to point out that supply and demand is more complex than a simple pair of numbers (the quantity of demand vs. the quantity of supply). One must look at a supply curve (number of housing units available vs. price) and a demand curve (number of housing buyers in the market vs. price). (OK, its more complex than that cuz their are multiple coupled curves by geographic area and house configuration). The point that many are trying to make is that mortgage rates have artificially inflated the demand curve -- although buyers have not increased the monthly payments that they can afford, low interest rates mean that they can afford to "pay" high equity price levels. The inflated demand curve has evn fed on itself because people who are selling at inflated prices can use the added equity plus added buying power to buy an even more expensive house. Finally, the surging real-estate market and tanking stock market create huge psychological forces to more money into real estate (stocks are going down and real estate can only go upm, right?) In many markets, the supply curve is trying to chase this upsurge in demand -- current owners are selling at inflated prices and builders are busily creating new subdivisions (or rebuilding smaller homes into high-price luxury homes). When mortgage rates rise (or lenders become stingy with approvals due to either defaults or a lack of available capital) the demand curve will retreat rapidly. If employment worsens, the demand curve will retreat (fewer people who can buy a house) and the supply curve will expand (more people forced to sell after losing their jobs). Many will find themselves upside-down on their mortgages and declare bankruptcy. Distressed properties and vacant new properties will exacerbate the downward pressure on prices. Its a self-amplyfying system about to hit the wall. -Traden4Alpha
1) if they lose their jobs 2) if they need to relocate and find thier 300k home will only sell for 200k
Can someone who knows real estate describe what would happen in a housing market decline? I have heard it said that nationally the prices of houses would never decline because people don't want to sell their houses at a loss, so they'll just hang on to them until the market catches up. What would that mean for home buyers? Would there be lower prices at all?
30 Year FIXED? Are you serious? Man, I've never heard of such a long term fixed loan! Has anyone heard of this? Is it through seller financing? I can't imagine a lending institution would give such favorable terms!
I was actually agreeing with you Alpha.. Yep, the demand being "artificially" created is a good way to put it ("artificial" only cos we know what "normal" is). Not only are people using added equity to buy houses, they're also using it finance "toys", which inherently decrease in value, like cars, boats etc.. I have never been a purveyor of doom and gloom, but guys, this could get UGLY. (Nasdaq 5000 watchout! ) PS- hope i'm wrong!
I'm no real estate "expert", but I can make a couple of points.. Whilst many people would not care to sell their houses no matter what the price situation may be - afterall, buying a house isn't just a money making decision - some people will be forced to sell their houses. A rise in interest rates, a rise in unemployment would be sufficient causes. People would have to sell at any price. What do you think that does to prices? "Would there be lower prices at all"? Well, it's already happened in this country, recently too - check out the 80s. It also happened in the late 80s in Australia. After hitting a peak in 87/88, median house prices suffered a 50% decline during the next two years. The interesting thing was that interest rates were actually falling during this time!
The nice thing about real estate collapses is that they do not happen overnight. You don't wake up one morning and your house is worth half what of what it was yesterday. But once home values go down, they generally never recover. Just another reason to live a debt avoiding lifestyle. Pete
First of all, living a high debt lifestyle is NEVER a good idea. I'm in complete agreement with you there. Real estate collapses don't happen "overnight", they might take a year or two. In real estate terms, that is QUICK. It's not just a matter of hitting "SELL" on your keyboard, getting rid of a house takes time. Ever tried dumping a lot of shares in a mad scramble to cut your losses? Imagine trying to get rid of your house at the same time as every other Tom, Dick and Harry. Prices generally never recover? Well, I don't have the stats about the price recovery of the last dump in US homes, but I do for the Australian version. After losing approx 50% value from 88 peak (might've been 89) in 1990/91, prices were back at their peak median level by late 97. Since then, median house prices in Australia have gone on to greater and greater "all time highs".
I know a couple that bought a nice little 2 bedroom home in Long Beach at the height of the last run-up. Four years and two kids later, they HAD to move to a larger home. They sold their first home at a loss of ~70K. They bought bigger house in a better area and took the hit on the first home. It worked out well for them because the equity in the second house today is worth well in excess of the loss incurred on the first. The people that get killed in a pullback are the ones that start out in the end period of the run-up and don't have a family but are planning on children. Space becomes precious and they have to move to more Sq Ft. It's vicious sometimes...... Later, Cracked