I agree with prices and rates being high contributes to a slowdown, which is why now I think they should keep the rates low. Adversely, Greenspan and the board really screwed up right after the beginning of the boom by not forseeing its bubble effects and slowly up rates to balance that time. Predatory lending was a Big problem too, but also just the supply and demand of many, many investors and speculators eating up the supply (who I called inflated demand from the beginning because they couldn't easily live or rent it all) leaving 'real demand' buyers to fight and frenzy right along with them. Then of course builders tryed to meet this full demand and more with tons of projects, and here we are.

Zack, I see what your saying, but if you look at his advertised site a Realtor cannot even post a listing there. He makes no claims to actually be a Realtor or at all affiliated with our organization, actually on a brief scan kinda looks like competition - but no worries. He isn't labeled a real estate pro, just buyer and seller which isn't necessarily a bad thing just not the same thing.

Again, the last few years were never a 'normal market' and a lot of people began to look at real estate as a short term high-risk/reward investment which obviously it can be, but historically and easily real estate is a long term low-risk high-reward investment that is the single best wealth builder we have. Bubble, you said you had stacks of cash saved from renting which in some situations always does make sense but what can you really do with it? Invest in the stock market, which most will say is a long-term investment, 401k's and traditional ira's - without penalty Must be long, long-term, or finally use some of your admirably saved cash along with a huge majority (still even 97% Fha - good stuff) of some bank's cash to leverage you into a beautiful home of your own where it physically not only provides nice shelter and good rest every night but in 30 years(more/less) have a 100% equity to retire your rent payment forever to only a relative small insurance and tax payment - which are both fully tax deductible by the way.
I'm not saying you have to buy now, but there is a lot to see and truly a lot of deals - and will be for awhile, for either your personal or investment home! Best wishes, and I do hope you find a good Realtor who you come to know and trust, who will then efficiently and easily help you find the best home for your needs & desires - I promise you there are many of us out there! Because you do/or will own/lease a car too right?

Interesting question.

People buy what they can afford to buy. So, yes, to some extent high interest rates will make housing less affordable, thus putting pressure on housing prices. However, there's a delicate balance. Think back to, I think, the early 1980s, when interest rates were 13% and 14%. There was no way most sellers could reduce their prices sufficiently to make the overall monthly payment affordable to buyers. Remember: A lot of sellers can't reduce their prices below a certain level. Often, it's because they owe $X, and they need at least that amount (plus commissions, etc.) in order to sell. So, to use an extreme example, if interest rates went to 50% (other than a financial meltdown generally), you wouldn't see house prices drop sufficiently to keep monthly payments roughly stable. You'd just see the real estate market largely grind to a halt.

You note that high interest rates also mean more tax write-off. Yes, but not at a 1-to-1 savings ratio. Suppose, for instance, you're in the 28% tax bracket and you earn $50,000 a year. And say you have a $1,000 a month new mortgage, which (for this example's sake) is all deductible--the interest and taxes. So, you're paying $12,000 a year, and your tax savings (in the 28% bracket) are $3,360. So your actual cost is $8,640. That leaves you $41,360 to spend on other things. But now let's assume interest rates go up. Your monthly payment is $2,000 a month, all of which is deductible. So you're now paying $24,000 a year, and your tax savings (in the 28% bracket) are $6,720. So your actual cost ($24,000 minus $6,720) now is $17,280. That leaves you $32,720 to spend on other things.

So, while the interest rate has gone up, giving you a higher tax write-off, your after-tax income has dropped significantly--from $41,360 to $32,720. That's not good.

Also, a lower purchase price doesn't mean a quicker payoff. Loan are amortized over 15 or 30 years (or maybe 20 years, or 40 years). Whether the loan is at 6% or 18%, a 30 year loan is still a 30 year loan...unless you choose to pay it off faster. But you can do that today.

If interest rates do go up radically, there are a number of strategies for buying (or selling) a home without having to get a new higher-rate mortgage. That's what happened back in the 1980s. That was the market talking, and responding to the high rates. Many people went with other solutions (wrap mortgages, subject tos, seller financing, etc.) because that was the only practical way to buy or sell. High interest rates weren't a win-win for home buyers then, and wouldn't be today.

If prices are high, and interest rates are high, then nothing sells. There is a market equilibrium. The only reason prices were high and homes were selling is because banks/mortgage brokers were setting up people with huge loans (that they probably won't be able to repay). That drove the prices up. Think playstation 3 before Christmas. A $600 game console selling for $3000, but instantly worth $600 after Christmas again.

No a Realtor didn't mistreat me, I've just been watching what they have been saying for the past few years during the mania and realize they are just used car salesmen, but unfortunately people turn to them for financial advice.

An increase in interest rates might actually motivate fence sitters to take action. But, an increase in interest rates is not only just about housing. When the money supply is affected by changes in the interest rates, it impacts every aspect of our economy, not just housing. Expansion of money supply, through lower interest rates and other methods of monetary policy, encourage spending and fuel the economy. Contraction of money supply decreases spending, and is sometimes necessary.

A slight increase in rates might motivate fence sitters into action. There are many buyers who are sitting out on the sidelines, awaiting what they believe to be the bottom. The bottom isn't ever clear until it is behind us. If interest rates rose, some buyers might move off the sidelines and purchase, recognizing the bottom is gone.

But......interest rates are not just about housing..............

Interest rates are one component of monetary policy and those policy decisions encompass consideration on the total impact of all consumer and business spending, or not.

High interest rates would raise the prices of all things we buy, impede capital investment, hurt the job market and our overall economy.

Zach, thanks - no worries! I'm with you I want the craziness over sooner than later but with banks in limbo on thousands and thousands of homes in some areas i'm not sure how long it will take.

Good point with our general lack of savings! But I respectfully disagree on a home not being a long-term high-reward investment. Compare again to other common options; stocks - flucuate greatly but are generally somewhat stable in the long-term except if the company's go bankrupt or south, and then ira/401ks - obviously aren't as flexible or usable to leverage more investments until retirement (mostly) Also just strictly speaking as primary ownership vs straight rental on your living of choice - what about all the Thousands and Thousands of dollars not recouped towards anything but your landlord's pocket if you can find a comparable home in a a comparable or same area as where you would rent, almost never makes since unless your leaving the area for sure in less than 3 years - but then I'd still argue that you should buy, live there, and hang on to it and let another pay it for you! Because you can't skip a month on your rent either, but your investment home (not really - i know just hypethetically planning) or stocks you could.

Low interest rates increase buying power. For example on a sales price of $200,000 with an interest rate of 6.50% the estimated PITI payment would be $1,564.00 but at 5.5% interest the estimated PITI payment would be $1,445.00 a saving of $119.00 a month. In todays economy $119.00 a month could easily break a deal.

Mark,

Very good post. I personally think rates should be raised as this bubble needs to be popped and the disaster run through, slowing it down only drags out the pain. You rip a band-aid off, not slowly peel it.

I'm pretty sure JT's post was intended for me but he put your name in it on accident. I really though he was listed as Real Estate Pro but I must've glazed over a bit on that part.

Real estate is not a long term-high reward investment. It is something that requires irresponsible people to save as it hides the fact that they're saving. Also the tax breaks make them feel a little better about saving. With Home Equity loans now, you don't even have to save though. If you look at the case schiller index of home values vs inflation, it beat inflation by about 1% until this massive bubble. So basically real estate as an investment is no different than holding inflation-protected bonds, except you can't skip a month of investing since the bank will take your home.

Zack

Lower rates & lower prices means lower monthly payments for you! Higher rates means a higher payment!

Whoa, JT. Hang on, I'm not dissing your site and I really do think its a very valuable resource maybe even for me or my clients. I just stated the fact from your site that I can't post any of my listings on there and you didn't state you were a Realtor agent or broker on there - which again is fine! I wish it the best, and who knows maybe someday we'll be able to incorporate networking and helping more buyer and sellers find the right home for them. Take care

MARK C SMITH.. I HAVE DONE ALOT FOR THE INVESTMENT COMMUNITY I CREATED A WEBSITE TO HELP ALL SELLERS AND ITS ALL FREE , WHAT HAVE YOU DONE ..NOTHING SO BACK OFF

JT MARTIN

You answered your own question. There is an equilibrium and when people think of it as a monthly payment, its a lot easier to see. But unfortunately homeowners don't do that. They don't realize that if a town raises their property tax 40%, it will knock 5%+ off the value of their home (depending on the ratio of taxes to cost) since their monthly payments before the tax increase represented the approximate value of the home, that increase has to be accounted for elsewhere, and that is in your home value.

As for interest rates, you're right for first time homebuyers, although if rates went to 15% tomorrow, it would take a couple of years for homes to reset, possibly more since they're so overvalued right now. And since people are so emotional when selling their home, it could be even longer. Generally, they just sit on it and let inflation take care of their overvaluing and think "wow, i didn't lose anything". Anyway, I agree that higher rates with prices reflecting the rates are better for first time homebuyers. Most first time homebuyers have problems getting the down payment, since prices would be lower, that would be less of an issue. Plus rates can be refinanced, you can't refinance your purchase price.

Deborah's post is very good and points out a lot of things. Expanding money supply causes currency devaluation though and inflation, so its a delicate balance that we don't seem to do very well.

JT Martin, nice. You spam the boards for a FSBO site, then make a mindless response in a derogatory tone. Mark C. Smith, if your'e curious where intelligent buyer's attitudes towards realtors come from, look no further than JT Martin's post.

For those who can pay for their homes with cash, high interest rates would certainly be a boon. For most of the home-buying public, however, who needs a mortgage to buy a home, low interest rates bring homes that might otherwise have been too high-priced for them to purchase, a little more in reach.

Yes, low prices and low interest rates would be the optimal choice. But high interest rates are never "good" for home buyers who need a loan. Yes, you could argue that high interest rates might bring a reduction in price, but for those who need a loan, it might also mean the same (or higher) monthly cost, and therefore leave many homes still out of their grasp.

Chalk it up to whatever inflammatory rhetoric you want, but I can't see anyway clear to saying "higher interest rates are better for first-time homebuyers". We "could" find ourselves with high interest rates AND high prices.

Just curious Bubble, did a Realtor mistreat you at some point? If so I'm very sorry, but just because you got a bad apple once doesn't mean all apples in the bunch are always rotten as you seem to say in all your postings. Or are you just going for a wow factor to get people on your blog? Also, higher interest rates would mean less total purchase price for many people squeezing them out of the area or size they really want. Take care.

Mikem:

there is a difference between the following:
- a high interest rate w/ high inflation,
- a high interest rate w/ low inflation.

There is no chance that interest rates are going to 15% if inflation stays low.

Let's suppose interest rates do go to 15% from the current 6.5% or so. For a 100K mortgage, 30 year term:

- at 6.5%, monthly payment is $632,
- at 15%, monthly payment is $1264, exactly double.

I think Bubble's thinking is right. House prices will fall significantly.

However, I am not sure if we want that to happen.

Bubble, I would say pretty soon buyers will have their cake and eat it too, as much lower house prices and low interest rates will provide the best possible environment for the buyers.

Careful or you might get hit by the sky, which as I am sure you are well aware is falling. You should try to tell someone who bought their house in the 80's with a 15% interest rates about how awesome high interestrates are, see what they tell you.

Prices aren't falling everywhere, and not at the same pace. Buying with a lower interest rate menas lower monthly payment which means cheaper house (may not be cheaper at the end, but it's easier to afford it)

Your question is akin to this: "Why is everyone worying about credit crunch? If banks stop giving loans, then house prices will drop by 70%+ since very few people can afford to pay all cash thus lower prices. It seems like a win-win situation"