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Signs of a Housing Bottom



April 16, 2009 – Comments (6)

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.


6 Comments – Post Your Own

#1) On April 16, 2009 at 12:22 PM, devoish (65.42) wrote:

 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.

I should have noted that the first mortgage at 12 & 7/8ths was a thirty year fixed rate mortgage. The lower interest rate made a huge difference.

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#2) On April 16, 2009 at 12:33 PM, Melaschasm (< 20) wrote:

Devoish, nice analysis but you left out some possibilities.

If the markets have over corrected, and house prices are lower than their true value, we could see a reversion to the mean, and increased house values no matter what interest rates do.

If we have significant asset inflation, nominal house values could increase significantly in the next few years, while his fixed interest loan will not adjust.  This may cause higher future interest rates, after housing prices have already increased.

I do not know if either of those situations currently exist.  House prices may need to fall further, asset inflation could either not occur, or occur in everything except property. 

Currently there is great uncertainty and risk in the markets, including the housing market.  At times of great uncertainty there are great opportunities.  What isn't known until after the fact is which investments are great opportunities, and which are bad risks.   

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#3) On April 16, 2009 at 1:05 PM, jlmjlm77 (97.82) wrote:

If you can buy cheaper or close to rent cost and you expect to live there for 5 years it is worth it.  I bought a condo  in North Dallas, 1300 SQ FT by a community college for 33k in 1989. 1991 same unit going for 25k.  Bought a house and sold the condo in 1993 for 31k net of commission.  My total cost was much less than rent, (HOA dues + mortgage and tax $500 per month).  Rent was $600 for the same.  However, I probably would have done better to keep the property and rent it as a landlord.  Ten years later the property was selling for 80k.

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#4) On April 16, 2009 at 1:16 PM, TDRH (96.66) wrote:

If you buy a house now, I think you should be planning to stay in it for some time.   The key factor now is qualified demand.  Without alternative finance mechanisms you need real / proven income to buy a home. 

* Interest rates are at historic lows - when they rise, and they will rise, there will be fewer qualified buyers for your home.

*When the tax incentive for home purchase is eliminated there will be fewer qualified buyers for your home.

*As unemployment rises (hopefully not a long term trend) there will be fewer qualified buyers for your home.

*Median income in the US has been stagnant for the last 10 years, while costs for healthcare, education, energy and food have all risen.   I believe the cash injections in our economy by the fed and treasury will increase inflationary pressures on dollar based commodities and raw materials, but without relative increases in income, or real income, I see the qualified buyer base declining further.

Apologies for the dark predictions, but I believe housing has further to fall.

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#5) On April 16, 2009 at 1:49 PM, devoish (65.42) wrote:


How will you know when housing prices have corrected. Please don't wait for the NAR, or Rick Santelli to tell you.

My house is worth more, only when someone with more money than me, can buy it from me.

Lets say I can afford $3000/month for a house payment?

My monthly payment consists of $1500 interest and $1500 basis and my interest is  4 and 7/8ths.

Lets say interest was 12% when I started. Because I could only afford $3000/month I bought a payment with a $1000 basis and $2000 interest.

In order for that to happen I have to pay a lower price for the house in scenario two, than in scenario one. Whether that means a smaller less valuable house or a bigger house for less money doesn't matter, I can only afford what my income lets me buy.

In the second scenario if interest rates come down then I can refinance my 'lower than scenario one' basis to my considerable advantage.

In the first scenario interest rates will not come down, it would certainly be silly to expect them to because they have never been this low before, and a 2% drop will not help todays buyer as much as my 6% drop helped me anyway.

So if any future buyer of my house cannot get a lower rate, then he requires either a larger income than mine, or to pay me less than I did for my house. Especially if he is paying more of his housing budget to the bank in a higher interest rate which is the far more likely scenario.

Asset inflation means more of the future buyers income is diverted to food/clothes/energy and he has less to buy a house with. If that happens in a huge way, without increasing salarys, Mandrake will find himself in a house he can no longer afford as he is paying more toward food, etc.

Unless everyone elses income is rising faster than Mandrakes, and might out compete him, he should probably wait until he can pay cash in full for his house. That day may very likely be coming for him.

Add to that the loss of fixed income to retired folks. Anybody who was dependent upon dividends or pensions to pay their mortgages or rent in retirement will be moving into a smaller house, or in with their kids or out on the street.

Without rising incomes or immigration, house prices are still going down.

Government is cutting salarys. Corporate is cutting salarys.

Interest rates are rising, except in mortgages because of Gov't support, but you still need buyers to put in a floor.

Where are the incomes to buy with?

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#6) On April 16, 2009 at 1:53 PM, devoish (65.42) wrote:

Or... What TRDH said.

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