I am truly fascinated that the bubble was caused by interest rates - the lower they went, the lower payments could go, thus the higher the true price of the asset could rise.
Since the vast majority only look at the monthly payment, and not the asset price, I would imagine rising interest rates will have the same effect - the payment will have to stay the same, thus asset prices must come down for these buyers to have any interest in purchasing.
Also, you know there's a world of pain right now for folks with ARMs that are adjusting with these new higher rates.
And finally, if Ben doesn't keep raising rates, and inflation gets out of control, mortgage rates will go even higher.
Mortgage rates rose for the third week in a row, sending the 30-year loan to its highest average rate in 49 months, according to Freddie Mac's weekly survey released Thursday.
The higher rates, which have moved up more than half a percentage point since the start of the year, are definitely cooling off the housing market, returning it to more normal levels, according to Freddie Mac's chief economist Frank Nothaft.
"With higher interest rates, the housing market has begun a gradual and orderly reversion towards historical norms," Nothaft said. "For instance, new construction, home sales and house price appreciation have all been slowing over the past few months."
For the week ending Thursday, the 30-year fixed-rate mortgage averaged 6.78% nationally, up from last week's 6.71% average. The rate averaged 5.62% at the same time last year, and has not been higher since May 24, 2002, when it averaged 6.81%.
July 02, 2006
Mortgage rates up to 5 year high. You know what that means.
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22 comments:
News Flash - Helo Ben - now listen carefully - has ABSOLUTLEY NO CONTROL ON INFLATION - it is hear to stay - rates have soared, gold has and will continue to soar, NYSE will more than likely hit 15K-before it tanks to 5K in 2Q 07; oil is THREEE TIMES what it was 2 years ago AND RISING, world economies are tanking against the dollar ALREADY.
Raising rates is like pissing on a wildfire - the economy is crashing right before our eyeballs.
Have a nice day.
Slow grind down . . .
The American consumer will go down kicking and screaming - Headline this Weekend in Yahoo News - "40 Million take to road and air for 4th Weekend = Record.". . .and that with $3 gas!
I hate to burst the "bubble burst bubble," but we have to remember that 95% of homeowners do NOT sell their homes each year, and perhaps only 10% of total homeowners have purchased since 2003. . .those who purchased before then still have equity in their homes, and if prices go down, they will not move. A small percentage will go into foreclosure, and that will bring prices down, but I think we are looking at a 5 year downturn.
Mortgage rates are still very low and affordable. A lot of people are refinancing into fixed interest rates. Inflation will help reduce the debt burden on middle-america. If the Fed had its way I think they prefer deflation since that raises the debt but increases the value of that debt to the rich who want to swoop in and absorb even more of America's wealth at the expense of the worker class. All those foreclosed houses won't vanish, they'll just turn into rentals to impoverished Americans to create wealth for the rich who have no interest in getting their hands dirty working.
Also back in the 80s interest rates went to 18% and more in Canada. The difference for many Americans was that we had fixed mortgages and Canadians had adjustable (still do). Most of my Canadian friends (my wife is Canadian) lost thier homes as rates soared and they had no way to lock in their payments. Here people who had a job and didn't have to sell due to their personal financial pictures weathered the storm and stayed in their homes. If American survived inerest rates over 15% I think they'll survive 8% mortgages.
Just as home prices and interest rates have a partial inverse relationship so does inflation and interest rates. Do you think that people paying 11-28% interest on credit cards etc when the inflation rate was 2% or the fed rate was 2% wasn't paying more than if the fed rate is 5% and inflation is 4% or higher? And for a mortgage? Would you rather have 2% inflation and a 6% mortgage or 4% inflation with a fixed 6% mortgage (like a lot of American's currently have)? And what if inflation hits Carter era levels? And interest rates climb to 10% or higher? Do you think those homeowners with a 6-7% fixed mortgage will wish they hadn't bought a house over the last five to ten years?
I agree with globalization the Fed has limited impact on inflation. Our national debt and lack of savings has an impact on interest rates and the strength of the dollar which raises or lowers import costs and the value of imported goods but doen'st really have the same impact on internal costs (unless people keep buying imports and demand pay raises to buy them) and makes our exports more competitive.
Just a few years ago oil was $50-60 a barrel less because of a major global slowdown in Asia and Europe so if the oil producers high energy prices leads to a slowdown again then prices will fall. But then I hope not, America needs to ween itself off oil!
World economies are tanking? Actually they are still rising and many hope Japan and Asia and Europe will take the place of the US in keeping world growth going.
The economy is crashing right before our eyeballs? A crash is sudden, dramatic, we are seeing a slowdown. Hot markets where houses sell in 60 days instead of 7 is a crash? Unemployment around 5% is a crash? A crash wll see 30% plus unemployement, Homes won't sell except on courthouse steps, oil will sell for $8 a barrel, office buildings will sell for 10 cents on the dollar, there will be tent cities across America, families will be destroyed, riots in the streets, suicides, that is a crash.
Hey Foxwood - you say "America needs to ween itself off oil!"
Really my friend and the replacement would be????? - oh let me guess - biofuel - no wait tar sands, no wait the Prius -
You need to educate yourself before you go spraying this board with nonsense.
You need to go here:
http://lifeaftertheoilcrash.net/Index.html
You need read this site my friend.
And oil was NOT $50-60 dollars a FEW years ago as you stated.
The price of oil was under $25 in September 03 - hmmmm......you may want to check your facts again.
http://en.wikipedia.org/wiki/Oil_price_increases_of_2005
People do look at the payment. If you can have a 500k house for the same payment as a 200k house because rates went from 12% to 5%, it was even "better" since a 20% appreciation on a 500k house is better than on a 200k house. Of course people don't really want to think about the reverse...
About the comment that 95% of the people don't sell their house every year, and so prices won't crash is a tricky area. Same with the stock market, its the "marginal sale" that sets the quoted on "last transaction price". This is why only 10% of a stock may trade in a day (among 2% of the holders) and add or subtract billions in market cap from a company.
Everyones "wealth" in their homes will be decided by the 5% margin sellers who "have" to sell. So yes, if you stay put with a nice low fixed mortgage you can pay, you will be OK, but the quoted prices may give your heartburn on your "asset" because your neighbor had to sell due to their toxix mortgage.
I agree with Richard. We have major public access to bogus information. I am selling a rental property now before I am stuck with it. My realtor e mailed one of those tidbits of disinformation out there, highlighting this moderate downturn in the housing market. Of course people in the mortgage and real estate businesses don't care to connect what's going on in the housing market to the larger economy. It is going to crash and there will be tent cities. Connect the dots-don't believe your realtor...
Foxwoodlief: You assume inflation comes with a yearly COLA for wage earners. This is not a safe assumption.
And oil was NOT $50-60 dollars a FEW years ago as you stated.
He stated it was $50-60 a barrel less. He is correct.
I believe it was around $11 a barrel as recently as 1999.
think about the homeowner who bought a year ago at the peak, with a no-down no-doc interest only ARM.
His $500,000 home is now worth $400,000 (that's the price it'd take to move). Yet his payment is going to keep going up and up.
= sure bankrupcy or foreclosure in 2008
Any comments on this post? Is this the way it works??. . .didn't know abouty this:
"In December, Jim gets a notice from the HELOC servicing firm. The notice informs him that due to a drop in the value of his home the HELOC is now undercolletarized by more than $100K.
He is notified that per the HELOC loan agreement, he is required to repay the outstanding balance down to $50K which is his new HELOC credit limit."
no language in my contract regarding this.
Wow foxwoodlief, great comment. One of the better ones I've seen in awhile. Funny how when a moderate, and well thought out opinion, can look outrageous when hysteria and panic are more typical postings.
Keith wrote,"I am truly fascinated that the bubble was caused by interest rates..."
Point of clarification. Asset bubbles aren't created by easy credit, but they are fueled by it. The larger cause lies in the propensity for people to speculate. It's the same underlying driver for the gambling industry.
I used to think that laws prohibiting gambling were unnecessary restrictions. Now, seeing the damage it causes, I'm starting to wonder. Perhaps we should keep sharp instruments out of the hands of children.
The massive speculatory bubble and its degenerate buddy the Real Estate bubble are near the end!!!
So true osman, artificially low rates fuel speculatory mania!! When the speculators leave the party, the rest of us are left to face a hangover.
"Mark in San Diego said...
Any comments on this post? Is this the way it works??. . .didn't know about this:
"In December, Jim gets a notice from the HELOC servicing firm. The notice informs him that due to a drop in the value of his home the HELOC is now undercolletarized by more than $100K.".........
My relative and his family are visiting from out of state this Fourth of July. He is in the loan dept of a major Maryland bank.
I showed him "Housing Panic". He loved it! Says that he knows that several of his competitors have such 'seizure' clauses in their ARM contracts and that it is a pretty common thing. His bank is fairly conservative, almost exclusively lends 'in house', i.e. to existing depositors, very few ARM's and even then has an 80% turn-down rate on housing loans. He knows, because he's the one who takes the guff when the loan is denied.
His banks goes out of its way to insure a minimum of dead assets on the books, hence the low rate of ARM's.
Richard if you read my statemet I said oil was $50-60 LESS a few years ago, at one point at like $13 or so ?
Hey Foxwood you also said "Homes won't sell except on courthouse steps, oil will sell for $8 a barrel, office "
8$ a barrel? that's a crash - hmmmm let's try $800 a barrel.
Did you got to lifeaftertheoilcrash.net?
I'd be interested in your thoughts.
Richard, I was stating what I think a "crash" means. If you look at the Great Depression, that was a crash. I would expect high unemployment, falling assset prices, social turmoil and such if there really was a massive default on over priced homes, so maybe one reason that Government's of the world will do their best to engineer some sort of "soft landing" as some call it.
On the other hand massive inflation could wreck havoc too. If oil wer $800 a barrel then I would assume the exchange rate for the Euro to the dollar at 100 to 1 and America will have fallen from World Power status to a third world India or China back in the 70s.
At least our stock market has been weak for five years unlike the bubble markets in Saudi, India, and other countries around the world. We still are not in the same hole as the Japanese with their dual Bubbles in the late 80s. Adjusted for inflation, and size of both economies and populations we still have a long way to go to duplicate their pickle.
I would still choose to pay $400,000 for a nice "McManison" than to pay the prices for a small Japanese apartment 2006 or a studio in London, Paris, Madrid, Barcelon, Rome, Berlin, just to name a few places where $400,000 still buys you 1/3 of what most American's would pay in that range (excluding maybe NY City/SF/Miami).
In most places in the USA home prices are at the mean inflation adjusted per sq foot as what people paid 40 years ago. The problem isn't the price but the unequal distribution of income that has occured over the past 15 years. So many parallels to the 1920s where the only reason the working class had a rising standard of living was "CREDIT" and the upper 1% gained the most and wages to productivity gains was stagnant. Apparently our government and the bed of Big Business interests and Stock holder interests haven't figured out that if you don't share the wealth there won't be anyone to buy your goods and services.
It may be noble that Bill Gates and Warren have donated billions to their charities but they'd had see much better returns by investing those dollars in the workers of America in higher wages.
Foxwood - you say , "If oil wer $800 a barrel then I would assume the exchange rate for the Euro to the dollar at 100 to 1 and America will have fallen from World Power status to a third world India or China back in the 70s."
I think this is not only highly likely, but likely to occur in under 5 years.
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