Newblet, you’re somewhat right and somewhat wrong. Since you were in OC, you may recall the OC Register housing section had a set of charts. One was price over the last year, one was payment based on ‘standard’ loans. While pricing rocketed through the roof, the pricing barely moved.
Once the optional payment loans appeared in mass, the payment went even lower.
So you are right, interest rates may rocket upward once the “credit crunch” is over and the Fed returns to fighting inflation. All that will happen though is home pricing will go even lower.
When many on the board talk about prices falling 30%, 40% or so, they are making the comparison based on today’s interest rate environment and today’s rental pricing.
If rental pricing softens, the prices will have more downward pressure.
If interest rates increase, the prices will have more downward pressure too.
To summarize for a short answer. In the current environment, median home price is $460K. It’s expected to correct, let’s say to fall $350K for example as ‘fair’ supportable price.
If interest rates rise to say 10%, instead of falling to $350K, the prices will fall to $240K. The reason is simple. The payments on $350K at 6% and the payment on $240K at 10% are the same.
The housing bubble is correcting because of affordability. If rates rise, affordability falls and home prices must correct further to restore affordability.
