ProShares UltraShort 20+ Year Treasury Message Board
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Interest Rates and Home Prices: A Question
I am thinking through the following.
The fed is artificially depressing interest rates through "Quantitative Easing". This seems to have had the desired effect, at least for now. So, home ownership is cheaper via lower mortgage rates. Of concern to me is that home prices would be falling far faster in a higher interest rate environment. Said another way, if QE was not working home prices would be diving much further and much faster.
As someone considering the purchase of a first time home I am trying to weigh out the pros and cons of purchasing a home in this type of environment and this is where the question comes in.
At some point, not too long from now, the Fed will not be able to successfully continue quantitative easing. IMO, the nations that lend to us and hold our debt will not idly stand by and let us print money forever before demanding the US take a different policy course or they threaten some counter measures to save whatever value the dollars they own have. Of course, this has already been happening vis-à-vis the G20 with China and Russia and other communists threatening a new global currency. (And, which by the way, Geithner accidentally said in public on television that he was OK with it, before being reprimanded and then retracting his words)
In this inflation based scenario; home prices should move inversely to interest rates. So, home prices would fall precipitously if this plays out.
OR
Will inflation run rampant and home prices skyrocket? The prices of all goods and services will increase (except my wages of course) and a house will act as an inflation buffer and protect the value of my savings.
OR
Does the economy recover and the Fed rein in inflation and home prices remain stable while interest rates remain low.
Comments/Thoughts?-
Houses are real terms assets like gold and commodities. If there is big inflation because of excessive U.S. money printing, the nominal price of houses will increase. Anyone with a fixed rate mortgage is going to pay back dollars that are worth a lot less than the ones they borrowed, not the contract signed when the loan was made. There will be less foreclosures in this scenario and the more cynical amoungst us believe that the Fed may be debasing the currency to solve the foreclosure/banks getting in trouble problem.
- 1 Reply to tjgceh
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"Houses are real terms assets like gold and commodities. If there is big inflation because of excessive U.S. money printing, the nominal price of houses will increase. Anyone with a fixed rate mortgage is going to pay back dollars that are worth a lot less than the ones they borrowed, not the contract signed when the loan was made. There will be less foreclosures in this scenario and the more cynical amoungst us believe that the Fed may be debasing the currency to solve the foreclosure/banks getting in trouble problem."
wouldn't it destroy the banks if they had a bunch of huge loans out at 5% and inflation was 15%? Not arguing, just trying to think it through.
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Rather than trying to guess what the economic future holds, which is impossible, look at the present situation. House prices way down, interest rates at historic lows. Keep it simple, buy now. You have a good deal staring you in the face, don't ignore it.
- 1 Reply to soldi_reali
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It does appear to be a good deal, but then again, that is also what I was told 4 years ago: "Cant loose", "Prices will never be this low again", "interest rates at historic lows" etc.
There is something to be said for understanding market conditions and future looking. Not that you will know the answer but you can assess the risks. This one is tough to read hence the questions. Also, since this is a starter home, I will likely only want to stay for a limited time; build equity and then move on. If I do not build equity then I am better off renting where I am now....
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"IMO, the nations that lend to us and hold our debt will not idly stand by and let us print money forever"
Have you seen any of this newly printed money? Do you know anyone that has?
Seriously. After 911 there was an influx of newly printed bills. Every time I got cash out of a machine it was brand new bills. This is not the case at this time. I expected to see some new bills floating around. It just seems a little bit suspicious to me. I have even discussed this with cashiers that I am familiar with and they do not see the new bills either.
Deflation is a myth. Go to a grocery store if you do not believe me.- 1 Reply to BGOOD4US
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Be Good; I got a laugh out of that one, you are right; I have not seen deflation come to a grocery store near me.
However, there has been a large # of specials and incentives which is the first step before prices fall. I think deflation in the current context has more to do with large ticket items rather than day to day items. Even local restaurants have not changed prices at all. They may have a few specials but that is it and they still seem to be fairly busy. So, my assumption regarding your observation that there are not “new” dollar bills being printed is that this is deflation for big ticket items which do not get purchased with bills but rather credit. Which when you think about all of this makes sense as this really is a credit "crisis" more than anything else.
So, extending that line of thought it seems that if the Quantitative Easing plan starts to fail it is likely that there will be more deflation on higher priced items and less on lower priced items. Based on this observation alone, the answer to my original question would be; home prices will fall much further.
One other interesting anecdote I must add here. My local CVS called me the other day and tele-marketed my own prescriptions to me saying that I hadn’t purchased all of the available refills and they wanted to place a friendly reminder that I still had refills left and would I like to have them refill it. WOW! Is this desperately unethical or what? Strange times, strange times indeed. Capitalism diminished to the level of pandering prescription refills to increase bottom lines....
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I'm in the same position as you. I figure (and i think correctly), that once rates go up (which they have to do when QE ends, or when china demands more than 0% for their investment), home prices will fall due to their (lack of) affordability due to higher rates. This, combined with all of the Alt A and Pay Option defaults, means home prices are nowhere near bottom.
Perhaps rates will be higher, but they will be tax deductible, and will leave house prices low enough that they might even appreciate in value someday- 1 Reply to dk3445
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We were in the same situation. We decided to lock in a 10 year mortgage at 4.80% (we should have taken a 30 year and waited for the hyper inflation). I think rates and inflation will skyrocket as a result of printing money on top of 2 trillion dollar Obama deficits. Scary stuff! I'm a local town politician and we never spend money we don't have. We make tough choices. The public love that we make choices to keep local taxes down. I don't understand why the state and federal people can't do the same!!! Good luck to all.
http://www.mortgagenewsdaily.com/consumer_rates/
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Stocktalk,
I've been wondering the exact same question. If you ever find someone who thinks they know the answer, please post it here. -
I would look at a 5% 30 year fixed loan as a gold mine!!!
- 1 Reply to putncalls
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A 15-yr. loan would be better. Lower rate and you build equity a lot quicker.
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There are no guarantees. If I was looking for my first house in this environment, I would make sure that I had a good emergency fund, in addition to a 20% down payment. If you don't have that, I wouldn't be in a hurry to buy, as I don't expect prices or interest rates to jump up that quickly. Your questions are valid, the problem is that nobody really knows whats going to happen.
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