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American Capital Agency Corp. Message Board

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  • raybans2 raybans2 Jan 31, 2013 5:10 PM Flag

    U.S. Mortgage Rates Rise With 30-Year Highest in Four Months

    Typically when the housing market starts to come out of a bottom all those people who were waiting to buy so that they would not lose money start getting worried that they have to buy soon or they will lose money. What you get is a period of pent up demand getting fulfilled. And once an uptrend gets established people stop waiting as long to buy. The sense of urgency goes up on the demand side. When this happens you start getting 10% increases yearly. Of course homes cannot go up more than inflation over the long term but when you are coming out of a major decline and a long period of no price increases following that, you can have a period of yearly 10% increases that can be sustainable for a long time. However there are factors that cause some markets to lag others. Locations that are popular for people to down size to in retirement often lag those areas that people move from when they retire. This is because these people need time to build up equity before they down size.

    What I said about homes not going up faster than inflation over the long term may have been over simplistic. It is more accurate to say that home mortgage payments cannot go up faster than inflation over the long term. In other words, the amount the buyer can afford to pay for their mortgage payment has to track the rate of inflation of salary increases. A person cannot pay what they do not have the money to pay. However interest rates can cause the price of the home to fluctuate quite a bit for a given affordable mortgage payment. So if someone can afford the payment on a $300k home at 3% then they can afford the payment on a $150k home at 6%, approximately. Thus interest rates can cause the values of homes to fluctuate. That is why I have always contended that one should buy a home when interest rates are high and sell when they are low. That used to be true until recently as the Fed. has been intentionally trying to control the value of homes with interest rates rather than it being the other way around. It is the chicken before the egg scenario. How can you have a market that reacts to interest rates when the fed predicts this and adjust rates to keep it from happening.

    My point being is that if the Fed. increases interest rates substantially that this housing recovery could be short lived. And then if the raising of rates by the Fed. causes the recovery to stall, that may cause them to lower rates again. It sounds like madness to me. You can't predict cycles anymore because the Fed. manipulates the cycles and you never really know what the Fed. may or may not do. It used to be that real estate cycles were as predictable as clockwork. But with all this wacky Fed. manipulation I'm no longer willing to predict the real estate cycles as confidently as I once was. So who knows when it is safe to buy a home anymore. Ask the Fed. Maybe they can tell you.

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    • The price of homes is not controlled by short term rates.
      Its controlled by long term rates. Hence QE1, QE2 and now QEForever
      When the Fed stops buying bonds the prices of homes will fall again.

      Once rates are higher people will fund their purchase with Adjustable Rate mortgages.
      the lowerst interest rate mortgages tied to 1yr or 3yr treasuries.

      This housing bubble is far from over in my opinion.
      I live in suburban NY so real estate prices will differ but;
      When I bought my first house I paid 2x my annual salary at the time. (1989)
      my mortgage rate was 10.25%
      it was enough to pay the bills, we clipped coupons , contributed to our savings, etc.
      When I look at the price of homes today (post crash) and I meet the neighbors I am sure these young couples are not making 50% of what they are paying for these houses.
      how do they live?
      the price of the asset has got to come down more.

      • 2 Replies to onion1273
      • For decades I heard people say you cannot lose money in RE. I would wonder what time frame they were really considering. I would also wonder if they were actually considering all the associated costs. Many times it is cheaper to rent/lease. But I always knew they had a location concentric view. There were many historical cycles in the states but more internationally.

        After equity cycles__you often hear talk that many will not participate in equities again. I wonder if this RE collapse will have the same effect on desired home ownership. Will it remain the main asset class for many Americans. I know people who are still viewing it in relative terms__I remember when a house in that neighborhood was going for X.

        [the price of the asset has got to come down more}
        That may also be more location concentric. But overall their is still false support in the RE market__RE tax and mortgage deductions for example. I do not that think the US is that far away from changes in some of the supports. That would have to be a headwind on demand.

        Canada is an interesting comparison (as is Europe and Japan) on how RE financials are handled.

      • Rather than compare the cost of the home it is better to compare the cost of the loan.
        200,000 at 10.25 vs 200,000 at 3.75 is roughly half today, so if one were to buy your home today they would be essentially getting it for half of what you paid back in 1989 and paying in cheaper dollars.
        Imagine paying half price for some other asset after 24 years

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