San Diego Housing Bubble News and Analysis

I'm not sure about how others feel about this, but IMHO, prices will have to fall considerably if the rates start going up. Otherwise, EVERYONE will be priced out. Think about it. You have to have excellent credit, 20% down, PROVE you can make payments. Eventually rates will rise, but if prices don't come down significantly then who's going to buy - or rather - who will be able to buy.

On the bright side, higher rates, more of a write-off? And if the prices come down significantly, even if the rates go up, I would think maybe there's a chance over the next 30 years rates will come down and you can refinance.

I'm sure I'm not stating it eloquently and correctly, but I think rates rising will force the price of houses down. That will mean lower property tax, too.

Bring it on.

Amen to that, jp.

I pretty much agree with jpinpb:

1. Interest rate rise
2. Less qualifier == Less buyer
3. More inventory
4. More supply == less demand
5. More houses to pick == lower price
6. Less pricy == even less urge to buy
(Why buy when you know it will be lower tomorrow?)
7. An equilibrium between "buy vs rent" will be reach at some point
8. bottom will be reached years from now...

The question is: What is the right thing to own during this time?

jp, I agree. :)

Nailed it on the head jp.

I'm expecting to pay double the current rate by the time I'm going to buy. There has been an insanely unprecedented amount of risk taken on by banks with all of the bad loans. That risk once it is fully realized will be priced into interest rates for those of us waiting this downturn out.

Precisely Capeman. Right now, the Fed Reserve has Negative Non-Borrowed reserves which means that on balance, there are more banks that have had to borrow their reserves from the Fed in order to stay liquid. They are technically insolvent. How long does anyone here really think that situation can last before our foreign creditors and the bond market in general doesn't have their say about that situation and make a drastic adjustment to compensate for it???

Another consequence of rising interest rates is that the money flocking the MBS, CDO will flee back to where they came from in an instant. Why deal with this crap when you can get a better rate from a more stable place. There will be no more "easy money" coming down the chain and the banks will be forced to realize whatever they can get out of the properties they are sitting on right now. In addition to this resulting in lower prices, the new mortgage applicants now have to prove that they "deserve" a loan in addition to putting a good percentage as a down payment. So why should anybody who has good credit, can pay >20% down in cash and has a good stream of documented income worry about rising interest rates?

I have been PRAYING for rates to go up 8%+ since 2006. My hopes have not been anwsered. The answer is in 2009 you will see rates at 6-6.5%. Do not worry to much about it.

NCrenter,
It is not a black and white as your realtor wants to make it out to be or as a few poster here would have it either. I guess some bears and realtors are not capable or thinking in a circumspect and nuanced manner on this topic. Maybe your realtor hasn't been exposed the light of reason but the local bears have and still echo the same things they did before, namely that "rates absolutely affect prices across the board, all the time, all circumstances". I advise you to expand you studies.

I have been coached to have the opinion that rates won't change much in the next year, for what it is worth.

I certainly would not worry about making a buying decision exclusively on rates. There are so many variables worthy of considering.

I don't get how someone can be very bearish on the economy and expect rates to rise at the same time. Especially knowing that BB is a recession/depression hawk. He'll do what ever he can to keep us out of one.

"I don't get how someone can be very bearish on the economy and expect rates to rise at the same time. Especially knowing that BB is a recession/depression hawk. He'll do what ever he can to keep us out of one."

You really don't understand what is going on do you?? We are a net debtor nation who is dependant on influx of foreign credit to fund the deficit spending. Bernanke doesn't really control the interest rates, at least not directly. He can only influence them. Ultimately, it is the market for debt that will control them in the long term and their appetite for risk and a weak currency policy that pays them back in weaker dollars.

You really don't understand what is going on do you?? We are a net debtor nation who is dependant on influx of foreign credit to fund the deficit spending. Bernanke doesn't really control the interest rates, at least not directly. He can only influence them. Ultimately, it is the market for debt that will control them in the long term and their appetite for risk and a weak currency policy that pays them back in weaker dollars.
I guess I need my eyes checked. I could have sworn that rates were higher last year and FFR were over 300 points higher. Man, I really don't understand what it means when the fed lower FFR by over 300 points. I guess the discount rate they control have no meaning either, silly me.

If you think that the fed under the control of BB will raise rate in the face of recession/depression, then the last several months must have been a dream.

"If you think that the fed under the control of BB will raise rate in the face of recession/depression, then the last several months must have been a dream."

You just proved that you don't know what you are talking about. If Bernanke doesn't begin to raise rates sometime in the next year or so, then bond market will do it for him at the cost of the housing market and economy in general. Sorry, but bondholders and creditors like to get paid or they get really upset.

You just proved that you don't know what you are talking about. If Bernanke doesn't begin to raise rates sometime in the next year or so, then bond market will do it for him at the cost of the housing market and economy in general. Sorry, but bondholders and creditors like to get paid or they get really upset.
I never argue that the bond holder wants to get paid. They do and they also predict higher inflation, which will case rate increase. Inflation is the opposite of recession btw. Please tell me what the bond market expect in 2005 when FFR were around 5.5%? Don't you remember the flatten yield curve? Don't you remember every starting to say we just peaked and we're heading for a recession? What did the Fed do when things start to really slow down? Show me your data that support your "theory" that rates goes up during a slow down and I'll concede that I don't know anything.

"Inflation is the opposite of recession btw."

No, inflation is an expansion of the monetary base or money supply. Higher interest rates reflect the need for risk and future payment in equivalent basline amounts. The two are mutually exclusive as far as I'm concerned. Recession just means that there is slowed economic growth or negative growth in real terms. If credit is harder to come by for businesses and there is price effects in commodities due to expansion of the currency, then why wouldn't there be a recession??

Back in 2006 I was expecting 30 years fixed to be around 8% by now. Obviously I was wrong.

My guess is that at some point Social Security will become means tested and that the government is committed to keeping asset values as high as possible. This means low rates to keep the 401k's up and to mitigate the lost of housing values as much as possible.

Keeping 401k's up will allow more people to be means tested off the rolls.

I have come to the belief that the government will do anything even tolerate inflation to keep the stock market up as high as possible.

The next bubble is (will be) the stock market.

John

If credit is harder to come by for businesses and there is price effects in commodities due to expansion of the currency, then why wouldn't there be a recession??
Here's your answer: http://en.wikipedia.org/wiki/Stagflation

Since you haven't provided data to prove that the bond market and the fed raising rates in the face of recession/depression, here's a couple of links for you to chew on:
http://en.wikipedia.org/wiki/Recessions
http://en.wikipedia.org/wiki/Federal_funds_rate

Based on government data, we have the follow recession in the past:
* January-July 1980: 6 months chart (worst quarter GDP Growth -7.8% spreadsheet)
* July 1981-November 1982: 16 months chart (worst quarter GDP Growth -6.4%)

* July 1990-March 1991: 8 months chart (worst quarter GDP Growth -3.0%)
* March 2001-November 2001: 8 months chart (worst quarter GDP Growth -1.4%)

The Fed responded with these:

* July 13, 1990-September 4, 1992: 8.00% to 3.00% (Includes 1990-1991 recession) rate drop chart rate rise chart
* February 1, 1995-November 17, 1998: 6.00 - 4.75 rate drop chart1 rate drop chart2 rate rise chart
* May 16, 2000-June 25, 2003: 6.50- 1.00 (Includes 2001 recession) rate drop chart1 rate drop chart2 rate rise chart
* June 29, 2006- (Mar. 18 2008): 5.25-2.25 rate drop chart

I guess Wiki and history doesn't know what they're talking about either.

"Back in 2006 I was expecting 30 years fixed to be around 8% by now. Obviously I was wrong."

heheheh -

I can beat that... back in 2004 I was expecting rates to be in the 8% range by 2006. I gave up long long ago trying to justify that things have to happen.

JWM I THOROUGHLY agree with your argument that in the future rates will have to go up. I simply do not see how they cannot. However I am not so sure they will happen in the timeframe you are speaking of or at the pace you are hoping for... Personally I would love to see it happen as well because for me as a potential buyer with alot of cash saved up, it would serve to increase my purchasing power, somewhat. However I have given up trying to make statements such as this or that HAS to happen.

In reality, nothing HAS to happen, yes things can/will eventually snap under the burden of debt. However to doubt the will of the powers that be to use EVERY tool at thier disposal to continue to keep the consumer buying is something that I stopped trying to do. I am amazed at the tenacity of these same powers that be. They have proven time and time again that they will continue with every ounce of energy to prop things up and let the reins out until they run out of leather.

We have already given the screw you signal to foreign investors who lost billions in MBS. Can and will we do the same for treasuries? I would think no we won't but... well I think there is a big but there. For all of the problems it would cause us there are big problems that it would cause our creditors as well if they said, screw you USA.

Can all this keep a low treasury yield forever? No way jose...Again, I do indeed agree with your line of thought. Just not as sure of the time frame as you are. I do think Ben will adjust them if he can get a couple months of stable economic numbers. I don't see him cranking them like he should but he will most likely nudge them.

Also we will be alot healthier financially to suck it up and raise the rates... Can't help but wonder where rates would be if Volker was running the show right now.

SD Realtor

"Also we will be alot healthier financially to suck it up and raise the rates..."

Healthier also might mean that confidence and buying power is restored enough to offset rate increases especially on the heels of any possible "over correction"."Healthier" will also coincide with supply/demand factors being more balanced. I know I am beating a dead horse but a direct correlation is not guaranteed and definitely not across the board to any and all areas and properties. Too many variables. Yes houses are going to keep coming down and in the current enviornment higher rates would be destructive to pricing in general. We don't know what the enviornment will be like when rates go up.

Asianautica, how do you think the Fed control's rates? What is the extent of their balance sheet used to control their target rate? Treasuries! Now tell me why rates have been so low for the last 8 years. Other countries buy our gov't debt and drive down rates in the process. Now tell me what happens when the foreign debt buyers see that the paper being tendered at the Fed for said Treasuries includes bad mortgages, credit card debt and even auto loans (all non AAA paper). You'll see foreign buyers running for the door. Here's a nice image of when this happened last when the Fed did not stop the nonsense and poor lending practices.

Long bond chart during the Depression

Now look at how much of its balance sheet the Fed has committed to this so far.

Fed Assets

The closer that gets to bottom the closer we are to a bond market dislocation. Then low rates are a thing of the past and the Fed can't do anything to stop it.

It doesn't matter, affordability is what it is. If interest rates rise then prices will come down even more to get in line with affordability so that it creates sufficient demand to sustain the price level.

We really need to INCREASE interest rates ASAP to prevent inflation from spiraling out of control.

I don't disagree with you guys that we need to increase rate. For the sake of the $ and inflation, I completely agree. I just think that the people who control this will do whatever they can to keep the economy humming along for as long as possible and hoping that it'll correct itself and we start to grow again. I just don't see Volker type rate hike unless they first admit there is inflation. You can't even convince everybody that we're even in a recession yet and based on the # that the government put out, we're not.

I don't think JWM or I disagree with you on the fact that 'They' will try to hold rates down as long as possible. What the balance sheet chart tells you is that 'They' are almost out of the dry powder to make an effect on target rates. The bond chart shows you what happens when 'They' fail and when 'They' fail we as taxpayers will be paying dearly for their losses and real rates go to the moon.

I agree the government will drag this out as long as possible so it will be less painful. I don't think it will help much, but they will try. I just think of Japan and their lowering of rates and how it did not really help them.

On another note, I reconsider that higher rates will lower houses. I remember somewhere there was a thread that charted rates and housing prices. There was a time when prices were high and rates were high also.

Still, though, I think it's a different animal this time b/c of the amount of free money, the teaser rates that allowed people to buy double the house - doubling the price. An abrupt turning off the spigot of free money is resulting in declines. I believe raising rates will push prices lower. JM2C.

AN,

You are confusing a couple of things I think. The FED doesn't have absolute control over the interest rates in the general market. They only control FFR which is the interbank rate. Banks are not lending to each other right now because they don't know who is solvent and who is not.
That situation can and will lead to higher unemployment at some point.

You still have not explained how we can't have a recession and inflation simultaneously. I can explain it...we already had the inflation...only it was largely within a couple of different asset classes namely Real Estate and the Financial Sector (hedge funds). That is where the money went...well it went there and ultimately ended up on wall street after realtors, mortgage brokers, securitizers, Bond Insurers, etc, took their cuts from the money. Volcker raised rates because he took monetarist view of the problem as opposed to a supply side perspective. He hastened a recession that might have been worse otherwise. It needs to happen now as well.

"JWM I THOROUGHLY agree with your argument that in the future rates will have to go up. I simply do not see how they cannot. However I am not so sure they will happen in the timeframe you are speaking of or at the pace you are hoping for... Personally I would love to see it happen as well because for me as a potential buyer with alot of cash saved up, it would serve to increase my purchasing power, somewhat. However I have given up trying to make statements such as this or that HAS to happen."

Actually, I'm not really hoping for anything. That timeframe is an amalgamation of predictions that I've gathered from various posts at sites like Calculated Risk (not CR personally), Mish Shedlock, The Mess that Greenspan Made, Market Ticker (I don't agree with KD on all, but some posters there are very astute), and The Big Picture. Personally, I don't care. My timeframe for letting this whole mess sort itself out is well into 2012. I've pushed the idea of buying a house completely out of my mind and emotions. It just is not a consideration until I see certain macro level changes take place on both a national and state level.

JWM in SD, I think we were debating about different things. I was referring to FFR.

You still have not explained how we can't have a recession and inflation simultaneously.
Why can't we have both at the same time? Wasn't that what happened in the 70s before Volcker took control? Inflation was high and GDP was negative, so they actually declared recession. That's what they called stagflation. But I guess you don't believe that was what happened.

Huh????

"Inflation is the opposite of recession btw." that is what you said. That would imply that you can't have both simultaneously. Regarding FFR, FFR is only the short term lending rate between banks, it is not the 10 year rate, and it is not what the actual market rate is.

AN, no offense, but stick to engineering and leave the behavioral finance to those more experienced with the subject.

I also read all of those other sites daily and agree with all of the data they present. If I could wait until 12 I would as well because I think that indeed is when we will have grinded through what we need to grind through interest rates and bailout programs not withstanding. Also it will be quite interesting to see what happens if we get political leadership into the white house that will advocate a more socialized approach to housing and an extension of massive spending. It is not a question of if but when we will see substantial interest rate increases and more interesting would be the reaction by our government if the foreign markets pull the plug on the purchase of treasuries... which as you know they already have slowed down on.

SD Realtor

If there's one thing Piggs should have learned by now it's that there's no point in trying to forecast the "when" of these trends. The markets are imperfect and the herd doesn't always act rationally; that is, until the're forced to.

It should be enough that you guys already have a clue about the (eventual) direction of these trends.