[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.
