[quote=Scarlett]
The prices drops will probably not be enough to compensate for the rate hikes when you look strictly at monthly payments. I think if the hike is big enough, we will see again more of the hybrid ARMs (5-7+ yr fixed rate) so again that will not help prices drop.
While I agree with 20% downpayment percentage-wise, I still think that being six figure for downpayment is quite a big chunk of money for the first time buyers (or people who sold their previous house without any gain – and their number will keep increasing). Of course one can go only 10% down and pay the PMI…I say it’s too large (amount-wise) in the current economy to put in an asset that has proven, gasp!, that it can actually depreciate substantially in few years (instead of doubling every, what, ten years?).
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Agree with you that there will be less money floating around for large down payments.
1. IMHO, one of the biggest reasons we’re seeing a lot of cash buyers is because interest rates are being held so painfully low. Investors are able to buy rentals or flips, and make a MUCH better return than what they are currently getting in savings or fixed income. If rates rise, I believe a lot of this money will disappear, as the housing market will have to compete with better returns on fixed income and savings.
2. If prices drop with rising interest rates, there will be less money from sales of starter homes (already happening, as starter neighborhoods were already decimated by late 2008). So, less money from the move-up market.
……..
As for those ARM mortgages, they were being pushed heavily during the bubble because of the historically low interest rates. If rates are low in the current period, they are more likely to go higher in the future. Lenders were using ARM products to shift this (rising) interest rate risk onto borrowers when rates were low. If rates are high (and lenders think rates are near the top), they will be more likely to want to lock-in those rates via fixed-rate product.
IMHO, while ARM loans will be available, in order to account for the rising rates, lenders will probably have higher starting rates, and/or raise caps on the increases over the life of the loan. They will want borrowers to qualify at the highest possible rate, because lenders will understand the risk of collateral price depreciation. This will affect what the buyers/borrowers can afford. Lenders might also increase down payment requirements for these loans to protect against the risk of depreciating collateral in a rising rate environment.
IOW, I’m not so sure that ARM products will give borrowers much more purchasing power if we begin to see rates rising rapidly.
Just a guess, but if I were a lender, that’s what I’d be doing.
