Signs of a Housing Bottom
This is my response to Mandrake's reply to yet another excellent TMFDeej post
#8) On April 16, 2009 at 10:14 AM, mandrake66 (99.58) wrote:
This is finally starting to become of personal interest to me. I'm middle-aged, single, and have always rented, but I'm just beginning the buying process. I just got pre-approved for a fixed 15 year mortgage at 4.75%. That's pretty astonishing to someone who dimly remembers the 1970s.
I'm in the Northeast and am definitely seeing property values drop and expect them to go considerably further in that direction. One unit in a condo complex I'm looking at now is in foreclosure and is being listed about 1/3 of its selling price from 2 or 3 years ago. My worry about a condo in this environment is whether the association is having trouble collecting fees. All of this was of nothing but academic interest to me until recently.
If interest rates were higher, your downpayment would become a higher percentage of the selling price of the house, and you would borrow less. Your monthly payment would be the same (everything you can afford) as you buy the nicest house in the nicest neighborhood you can.
Monthly payment = puchase price + interest.
If the interest goes up, the purchase price goes down. If the purchase price goes down, your down payment as a percentage, of the purchase price goes up.
I purchased my first house at 12 and 7/8 % with ten percent down.
Five years later I refinanced at 6&7/8 % into a 15 year mortgage with monthly payments 20% lower. A free gift from lower interest rates that at 5% you are not likely to get.
Now consider the condo you are buying as compared to the income level of you and the people who might buy there.
IF you are buying the most house you can afford, what happens to the value of that house after you buy it, if interest rates double to less than the level in 1989 when I bought my first house?
What happens if incomes continue to decline? The fifty year growth in incomes basically rolled over in the eightys with the decline of unions and upper tax rate. Income growth was replaced by low lending rates, which steadily went lower and lower, until the beginning of this decade when even low rates near 6% could not create more buyers. Laws were then changed to allow "downpayment assistance" which basically became corrupted into higher purchase prices at lower interest rates as builders supplied the assistance and then marked it up into the price of the house. Mortgage brokers went to ridiculously low lending standards to create even more buyers.
Now the lending rate has dropped to 4.7/8ths and the house prices still cannot be maintained and continue to drop. When interest rates go up, home prices will drop.
The housing market will recover when there are buyers who can afford houses. There are three things to look for as advance signs of a housing price recovery.
Foreign buyers come to the market and create demand.
Rising taxes on the "rich" to redistribute money to people who might want to buy your house after you do.
The ressurection of unions to redistribute wealth in the manner of taxes.
We are a long way from the bottom. Most likely we will see some combination of those three events at the bottom, and then the income bottom will take ten years to roll over just as the income top did in the eightys.