Please note the difference between “demand” and “effective demand”. Effective demand is a stool with 3 legs: desire, personal means, and financial leverage. Personal means includes factors like wages, downpayments and personal credit. Financial leverage obviously deals with the availability AND TERMS of the credit necessary to bridge tha gap between downpayments and sales prices. Take one of those legs out and the stool won’t stand.
If/when the foreign investors stop propping up our credit markets our interest rates are going to go up. If/when lenders and secondary investors start taking heavier losses on their RE – backed investments, interest rates will go up. Already, employment/wage verification and other underwriting criteria are going up. The reduction or even outright elimination of liar loans will have an outsized impact on the number of people who can buy at any price. If the U.S. Government has to close down a bunch of lenders because of losses in their residential portfolios, the remaining lenders could easily be compelled to return to hardwired 30% income ratios for purchases.
I also wouldn’t get too attached to the idea that a sub-8% mortgage interest rate is an economic entitlement that can be counted on in perpetuity. We went for a long time thinking that 10% was a good rate. I’d be downright shocked if by the end of this downcycle we weren’t back well above 8% interest rates.
Contrary to a couple comments about rents, I also point out that rental rates can and do decline during times of distress. It happened here during the mid-90s in the apartment market (and to a lesser extent in the house market) because it was overbuilt during the 80s. Now that our houses are overbuilt and apartment rentals have declined in some areas, I think that the recent gains in the house rental market are very squishy. It’s a stopgap measure attributable to investors trying to ride it out and the demands of the mortgages.
Another reason I think it’s squishy is because the impact of the declining market has only barely begun to be realized among the ranks in the RE and related industries and in those businesses that are dependent on discretionary spending. I don’t think it’s an overstatement to say that the cumulative effects of the decline of the RE industry could well turn out to be as dramatic here in SD as those caused by the decline of the defense industry during the last downturn.