[quote=FlyerInHi]Livin, what s scenario do you see rates doing up enough that would cause home prices to crash back to the 2009/2010 bottom?[/quote]
I didn’t necessarily say prices would crash. A crash would be caused by a forced investor liquidation and/or a lending crisis which most seem to think are currently off the table. That may be true but I’m not sure the risk is as small of some here seem to think.
I said if the interest rate trend change is secular and rates tend to move up then prices would decline over time as I don’t expect income gains to make up for the interest rate changes. That’s what’s happened in Japan even though interest rates have remained low for a very long time. Japanese home prices and stock prices have been bouncing along the bottom for 15-20 years after their crash.
The scenario for rising rates is pretty simple. Just look at most of the countries in the Euro zone. Their interest have gone up not because of an improving economy and rising inflation expectations. It’s been the complete opposite. They are facing deleveraging and the rates are going up because people are fearful that they won’t get paid back.
I’ll say it again, most of us haven’t lived through a period of deleveraging so we don’t understand what it’s going to mean. We’ve gone 30+ years of increasing leverage in a declining rate environment. The average has been a 3.5%/year increase in nominal incomes and a 40-50 basis point decline in the interest rate. That environment has allowed people to expand debt at a rate of about 6.5-7% per year and still maintain the debt to income ratio. When that trend changes things are going to be different and assumptions that it worked like that before are going to be wrong in that environment.