Instead of high interest rates we are liable to see lending criteria continue to become increasingly more onerous (e.g. higher collateral and credit score requirements). Those who can actually qualify for loans will get wonderful rates: everyone else (corporate or consumer) will just be shut out of the debt markets altogether.

This is where you and I probably differ in opinion. What we have today is reasonably high price inflation, but not wage inflation and certainly not asset price inflation. The current price “inflation” is due to higher prices of commodities due to a supply/demand situation. In this case, raising the cost of borrowing for US consumers/corporations isn’t likely to do much as the price rises are global and demand for gasoline and food are relatively inelastic in the short term. We’re not going to stop eating because corn got more expensive, and you can only decrease your gasoline usage so much in a short period of time.

What needs to happen for this current inflation to moderate is either:

1) Worldwide softening of demand (looks like it’s happening in EU now and therefore will affect Asian demand – which is significant)
2) Worldwide interest rate increases

I don’t think we’re going to have *both* of these things. I put my money on (1) happening in the next 0-12 months. The fed isn’t too worried about the current inflation, although they have to *say* they are. They’re likely hoping that the worldwide slowdown will bring commodities back in line, so that they don’t have to symbolically raise rates to “bring down inflation” when in fact all that will do is bring down inflation expectations at the expense of perhaps making the current recession worse.

Just my 3 cents… (previous 2 cents have been adjusted for inflation)

My assertion is that we will see highter interest rates soon. Given the market is already weak and people are already stretching to afford houses at current interest rates any increases will have an impact on housing prices.

If inflation hits 15% or some other silly high number, then we’d probably be in a wage-price inflationary spiral. So wages would be going up which would somewhat offset the lack of affordability brought in by the higher interest rates.

During the period 1970 to 1980, retail prices went up 97%. However, wages also went up 98%. This was a period of fairly high inflation in US history and wages and prices were both heading up at an average of 7.5% each year. The 18% mortgage rates were the absolute and temporary peak and hit at about 1982. So while mortgage rates went from 8% in 1970 to 15% in 1980, wages also doubled. The same factors driving wages and prices higher were also driving rates higher. When inflation and expectations moderated, so did rates.

Expecting interest rates to go up to those levels again pretty much implies you expect the economy to go back to that state, which is highly unlikely IMO.

Im just giving examples of what will happen if interest rates go up to 15%.
Try a conversation instead of insults.

15% would be devastating! I hope that doesn’t happen.
Tim, is there a way we could look at how rates affect housing prices ?
Maybe that would put in perspective how deep an affect a point increase can have…

That’s laughable. If I have a reasonable downpayment saved for a $400k house (20% or $80k), I could almost buy that $100k house for cash. Heck, why not put it on my credit cards and earn some points?

Certainly some buyers were bringing home equity to the closing table and even more so in retirement communities where buyers were actually moving into the recently purchased homes.

A large number of buyers were also cashing in stock market gains for downpayment (or full payment) on their vacation home.

Unfortunately, I don’t have any data showing us where the money came from.

Anecdotally, the number of folks looking to purchase homes seems like it is holding steady. The number of qualified buyers remains high and I haven’t heard of many difficulties with financing getting approved.

What I see on a daily basis is buyers waiting longer to become comfortable with the idea of the buying a vacation home in a time of economic uncertainty.

With inflation out of control the fed will have to raise interest rates, forcing housing prices even lower. I will not be surprised to see 15% interest rates again (the loan on my first home was 18%). If you can afford a 400K home with today’s 5.75% interest rate you will only be able to afford a 100K house with a 15% interest rate. It would be interesting to see how interest rates have affected housing prices (although it might be a difficult correlation due to the many factors that affect housing prices).

Using a rule of thumb that truly affordable homes cost no more than 15 times their annual market rent

Where an affordable home is defined as 75% of median home price.

Quick check of history for Seattle – back to 1985 – indicates that the median home price has never even approached a 15x multiple. The long run average (before the recent run up) for Seattle is closer to 25x. And 75% of 25x =19x – which means they are overstating the potential decline by a full 25%. And I would guess for most of the cities on the list the same is true.

The idea that there is some “rule of thumb” that you’ll revert to a 15x multiple is not supported by any data I have seen.

http://www.nytimes.com/2008/07/09/business/09housing.html?hp

I’ll bet that many vacation markets were tied to people cashing out equity on their primary residence for that 2nd home.

Who’s gonna buy now?

I’m expecting resort property to really plummet in price with very few exceptions…such as Aspen and Vail.

Leavenworth? Not even in the same league.

For Seattle, today that would be about $336K.

They claim that by 2012 that house will be priced at about $ 228K.

Projected equity in 2012
Seattle: -108,427
Tacoma: -111,496
Bellevue: -114,151

Any way to know the area (sq. ft.) of that $449,700 home???

Don’t you love how people that have time to hang out all day posting on blogs are all millionaires, dating supermodels, and extremely generous in their advice.

BTW. I hate to gloat but we had a discussion about six months ago about ways to short the real estate/mortgage market and a lot of people suggested SRS and SKF. Anyone looked at the price lately! Thank you god, thank you god, thank you god.

PSSS. Please repost the old discussion so I can reference our collective genius.

Ahhhh…thanks for our daily dose of smug PNW passive-aggressiveness.

And if you are making $80k a year and living in metropolitan seattle and renting maybe its a good idea to look for a job that actually pays you a decent salary.

This is a dead cat bounce.

No, it’s almost all in equities.

in other news i bet the savings portfolio is holding up even better..let me guess the 80 – 100k you have saved is in cash right guys?

lol

Did anyone ever notice SoftwareEngineer never posts on topic but yet thinks his posts are important enough to have their own headlines? Awesome, just awesome.

IMHO, we are no where near bottom, but……. foot traffic at open houses is increasing, the weather is getting nice, interest rates are on the rise, gas prices are holding up the close in areas and the negative media is starting to die down…. yes, it’s a great time to buy buy buy!!! Just ask WaMu and their shareholders: Whoo Hoo!!

If you model supply/demand with a standard demand curve, it is obvious that there is lots of demand at prices below today’s prices. As prices fall, more of that demand becomes active. But it is unlikely that a small change is price is going to bring the amount of demand needed to push price back to the peak.

Instead prices will asymptotically approach the equilibrium price that the price/demand curve defines.

No, I’m not. I’m sitting on cash (sold in ‘06). It’s not what you make, it’s what you keep.

Did inventory really drop or is this just a reporting glitch?

What does ‘pent-up demand’ mean? ‘Pent-up’ for prices to return to a level supported by fundamentals such as household income and lending practices? If so, then I have to agree with Angie for once. Speaking of lending practices, I sure hope you were not counting on Indy Mac to un-pent your demand. OOPS!

I lived in San Diego for several years and heard a ton of people just like yourself talk about how San Diego is immune from this down turn. Unfortunately, their ignorance, as yours soon will, got the best of them.

King Co. inventory rapidly on the rise…exactly what happened in CA, FL and AZ before prices dropped 20%. As a renter with cash, I can’t wait.

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MOS in King County is already balanced at 5.9. As people become confident in the local market, probably when the YoY figures are on a base last year that is after the credit meltdown, then sales will go up. That increase in sales will probably offset any increase in sellers that are currently holding off the market waiting for a better time to sell.

As for the post on activerain.com about $/sq ft dropping while price is increasing, that is a sign of people scooping up the bargains.

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Hope everyone is having a good summer!

For my part, I think b back at #24 is on the right track. Sellers are hoping that they’ll be the one that reels in a (near) full-price offer. With as many properties as are on the market, in the next year or 6 months the prices will really start to fall as people realize that supply needs to balance with demand.

I also strongly suspect there is a *lot* of pent-up demand in the area, so that prices won’t fall as far as you all think or hope.

Luckily, those of us that are educated can pray on chumps like you when you are begging to sell your house in a couple years at 40% less than it is now.

“Lord, deliver us from the chumps, right after we rook them out of their houses!” Or did your highly educated self mean “prey”?

I imagine it gets a bit disgruntled to talk about an anomalous data spread in June’s house prices in Seattle with a simultaneous need to demand taxpayers bailout bad contracts in Seattle to prevent more foreclosures.

Speaking of education credentials, what percentage of rich educated folks in Seattle are paying full asking prices for Seattle homes? Maybe the blue collar workers have more common sense than that? Just wondered [and I'm highly educated too].

The only important number of the June numbers is that listings are up 25%. Higher Supply and lower demand = lower prices coming to a neighborhood near you.

Luckily, those of us that are educated can pray on chumps like you when you are begging to sell your house in a couple years at 40% less than it is now.

Nobody getting all snarky on him for that one.