[quote=Bob][quote=4plexowner]”I’d rather buy a cheaper house with a high interest rate than an expensive house with a low interest rate”
amen to that – high interest rates is one of the things that will cause a real market bottom – as interest rates rise housing prices will drop – at the extreme, interest rates would be so high (mortgages in the 1980s were as high as 21% with 14% being typical) that only cash buyers would be able to purchase real estate (and you can imagine what prices would be like in that environment)
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I’ve spent a few posts discussing this very issue, and let me say one thing. History always seems to repeat itself. The Federal Reserve and the Obama administration have implemented spending policies to create long term inflation. This was designed to fight the current deflationary cycle we’ve been in the last year or so. The problem is that in fighting deflation, they are creating an even bigger problem down the road, which is the devaluation of the dollar and inflation.
As a previous poster suggested, the Federal Reserve is currently buying TRILLIONS of dollars worth on US treasuries to jumpstart the economy after seeing that none of the other measures implemented by the Feds were working. But the Feds admit they won’t continue purchasing US treasuries indefinately, nor could they even if they wanted to. What does that mean ? It means long term interest rates will go higher as the economy improves, and the possibility of a bond market bubble.
Although I’m not predicting it, I wouldn’t be surprised if rates on a 30 year fixed went up to 8% by the end of 2010. As rates go up, fewer people will be able to afford loans, and housing prices will remain stagnant.
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Bob, thanks for getting us back on track and for the excellent analysis. Any other thoughts on the topic of when interest rates will start moving up and how this inevitable shift will shape the local real estate market (including bank behavior)?
