[quote=Eugene][quote=Effective Demand]
I still can’t imagine what the housing market would look like with 7% rates. I don’t think too many of todays homebuyers have thought that far ahead. But that would make the cost of money increase 35-40% and decrease buyers purchasing power significantly. [/quote]

Strictly speaking, rates at 7% instead of 5% would increase one’s pre-tax monthly payments by 16-18% (assuming same purchase price), and, once you account for tax deduction, the increase could be even less, especially at the high end.

Consider a hypothetical household with a 200K pretax income, 850K purchase price with 20% down (on the upper bound of new conforming), with hefty MR and HOA. If interest rates go from 5% to 7%, nominal monthly payments go up 17%, post tax deduction housing costs go up 13%.

[quote]The multi-trillion dollar question is.. how long can the Fed keep 30 yr rates this low. [/quote]

It’s supply and demand, and there are many factors affecting supply and demand.

For example, interest rates north of 6% would cut off refinancing (half of all people with equity refinanced in 2003, the other half refinanced in the last 6 months), and, without people refinancing, volume of new mortgage originations and supply of mortgage backed securities would shrink dramatically. [/quote]

I think what you miss in the calculation above is the emotional/psycological aspect of 7% interest rates. Alot of people are running out and buying now becuase rates are so low, and prices arnt bad (if you can find one). Atleast that is what is getting them off the fence and looking. I dont know how many times I have had to listen to someone trying to get me to start trying to buy a house in the past 4 months or so, but EVERY single one of them I can remember started the argument with low rates.
Now 7% is historically quite low, in the late 70’s to 80’s people couldnt even dream of 7%. But we have had low rates for nearly a decade now. Twice falling below 5% for an extended period of time. People have gotten use to paying really low interest rates, and they wont like it when things go up.

7% (right now) will do two things:

1) People would be less enthuiastic about houseing. There will always be bulls, there will always be people who buy houses. I am talking percentages, and it would be reduced, leading to lower demand and…….

2) NAR would be screaming their bloody heads off till either the government started “intervening” again; or they start suicided bombing the Fed.