I think it’s a mistake to think that when interest rates rise the resulting salesprices will only adjust to the point that the monthly payment is the same.
The only reason there is a 70% disconnect between the market rent and the market value of homes right now is because the buyers have been counting on the potential to profit upon resale. The reason the investors got out of the housing market was because they realized that the “short-term profit motive” was gone. Sooner or later most property owners are going to come to the same conclusion – there is no short term profit potential right now. Thus, no reason to pay the premium for ownership.
I think the increase in interest rates will be of greater impact on pricing than the relationship of must-sell listings to will-purchase buyers OR the number of ARM resets. Combining the three factors – credit, distress listings, and ARM resets – and the results will exceed the mere sum of the three; those results will be compounded.
I think it’s actually possible that nominal pricing could overshoot the long term trend and go seriously into the red if interest rates go up drastically. Who knows? Maybe the pricing could even settle back to 1996 levels before it’s all over.
Letsee: a $250,000 home with a 90% loan would result in a monthly payment of $1,958 + $275 for property taxes and insurance = $2,233/month. That easily compares to a $2,000 monthly rent, and right now we can rent $600k homes in SD County for $2,000/month all day long.
