Posted by: The Tim

Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market.

95 responses to “Do Rising Interest Rates Lead to Falling Home Prices?”

  1. Ira Sacharoff

    1. Feeling pressure is never a good reason to buy a home, but I’ve seen it over and over again. It becomes an obsession. But it seems like a pretty drastic way to satisfy an obsession. Vigorous exercise or a stiff drink might do the trick to relieve that pressure for a while.
    2. Sometimes home prices are more dictated by what’s going on locally, and at other times there are larger influences. The 1969-1974 period, for example. Interest rates were rising, but locally home prices were dropping, with the Boeing bust, but nationally home prices appear to be more flat than dropping?
    Yet the 2005+ home price drop, people were blabbering about how it couldn’t happen here because our economy was so strong. People didn’t take a broader view. Microsoft and Boeing don’t only sell their products at the Columbia City and Ballard farmer’s markets. If your customers are suffering economically, what happens to you?

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  2. WestSeattleDave

    Frequently, interest rates and inflation do indeed go together. However, usually higher interest rates are a result of inflation, not a cause of it. An increase in the Federal funds rate is a classic monetary response to rising inflation, as the Fed attempts to remove liquidity from the economy. I think we are entering just such a period, although I have no idea when exactly it will arrive. The Fed and the Treasury have pushed huge sums of money into the economy to counteract the effects of the recession, and when (if?) the economy begins to improve, they will need to remove that stimulus if inflation is to be avoided.

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  3. AMS

    Yesterday as part of a comment I suggested, “8. If interest rates do go up, and if housing prices hold, or go up, then simply buy a less expensive home. What happens if everyone does this?”

    http://seattlebubble.com/blog/2010/02/08/housing-atm-we-have-a-winner/#comment-93895

    As is the case with almost every issue here, it’s been covered in the past. Without reading the 141 comments, I’m going to assume that this update was made in close proximity to the original post on July 16, 2008:

    “[Update]
    The best argument anyone has brought out so far basically boils down to “prices won’t go down, people will just buy smaller houses.” If that’s the case, won’t sellers of more expensive houses have fewer buyers as a result, forcing them to drop their prices?”

    http://seattlebubble.com/blog/2008/07/16/interest-rates-vs-home-prices/

    I’m going to add that if lower-priced homes were suddenly demanded by more consumers, then those home would have added price support. The lower end homes always have the greatest number of buyers able to buy. These buyers might not be willing, however.

    That’s fine and well, but Las Vegas has been falling for quite some time. One might think that prices can only fall another 10% so often, but there seems to be no limit to the number of times prices can go down another 10%.

    Now that the median asking price is down under $150,000, and the government is paying $8k or $6.5k to many qualified buyers, the price reductions have slowed, but prices have been going down for some time. Using the source cited below, year-over-year asking prices are down over 17%. I’d bet there were a lot of first-time home buyers who thought they’d take the $8k with the thought that they couldn’t lose. Back in the day the median asking price was closer to $350,000, without any first-time buyer tax credit.

    Today a qualified first-time home buyer could buy the median priced home for $136,000 less $8,000 = $128,000. What’s a good housing purchase price to annual income multiple?

    $128k/2= $64k
    $128/3=$43k
    $128/4=$32k
    $128k/5=$26k
    $128k/6=$22k

    You pick the multiple you want to work with, but if we assume a two-income household, we are not far from minimum wage earners being able to buy a median home at a reasonable housing price to income multiple. At the same time, we’ve seen plenty of homes in Detroit go unsold for $500. Clearly prices can go down further, but at some point prices are low enough that it won’t be much of a financial impact if prices do go down further.

    http://www.housingtracker.net/asking-prices/las-vegas-nevada/

    This brings me to another question, and yes, it’s been covered here in one form or another. I was asked recently by a single mother where is the best place to live. She wants to make the high income of the Bay area, but she isn’t sure she will net out ahead. If she were to move to an area with low housing costs, like Detroit, she still is not sure she’d make enough money, because of the economic conditions. We’ve also had claims about how desirable areas will always be desirable. I do not agree with such claim, but the question is where is the best value. In other words, let’s maximize the benefits while minimizing the cost. Certainly if you knew an area was going down, then you’d want to avoid that in favor of an area that is going up in value.

    At present prices, are homes in Seattle a good value?

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  4. DefineTheBox

    The relationship is indeed inverse. As inflation rises, the Fed must consider raising the prime rate to try to reduce demand. If demand drops too far, such as after the tech stock recession, then the Fed must lower rates to stimulate demand. One doesn’t really cause the other per se, but is in response to it.

    Interest rates have been kept artificially low since our last recession of the early 2000s.

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  5. anonymous

    By WestSeattleDave @ 2:

    Frequently, interest rates and inflation do indeed go together. However, usually higher interest rates are a result of inflation, not a cause of it.

    More accurately, I believe long term expectations of inflation are mostly what determines mortgage interest rates. People aren’t going to loan you money at low rates if they believe you will be paying them back in less valuable inflated dollars, but they will give you a lower rate if they don’t expect much inflation in the loan period.

    Also, inflation causes nominal house prices to go up, so some people might pay more for a house if they are partially using it as a hedge against expected high inflation.

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  6. softwarengineer

    The Housing Affordability, Especially Seattle Type Areas, Are Like Brakes With No Lining Left

    What do you think the Pink Ponies all cringe when you mention interest rates going up….they know the monthly mortgage payments cannot go up, its impossible.

    That leaves only one thing to happen when interest rates go up with more debt; house price collapse inversely proportionate to interest rate increases. Its slamdunk.

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  7. anonymous

    By DefineTheBox @ 4:

    The relationship is indeed inverse. As inflation rises, the Fed must consider raising the prime rate to try to reduce demand. If demand drops too far, such as after the tech stock recession, then the Fed must lower rates to stimulate demand. One doesn’t really cause the other per se, but is in response to it.

    Prime Rates and Fed Fund rates aren’t the same as mortgage interest rates. If I remember correctly, mortgage rates are more closely correlated to 10 year treasury bond yields (also determined by inflation expectations). There must be a mortgage expert paying attention who can give a more educated view of what goes into mortgage rates.

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  8. Ira Sacharoff

    RE: anonymous @ 7
    Mortgage rates aren’t determined by 10 yr T-bond yields, but are influenced by them, as well as by the market for mortgage backed securities and 30 yr T-bond yields.
    So, if the question is : Is there a direct correlation between 10 yr T-bond rates? The answer is yes, except when there isn’t:)
    Not that long ago, it was closer. The general rule was that the 10 yr T-bond rate plus 170 basis points ( 1.7%) would be a ballpark figure for a 30 yr fixed mortgage rate. That’s not quite true right now.
    Maybe Rhonda can elaborate on this?

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  9. softwarengineer

    RE: Ira Sacharoff @ 8

    You Got It Ira

    I often wondered the last 10 years how banks could make a profit giving out 2.5-3.5% CDs and still make enough profit to run bank business overhead lending at 5-6% mortgage rates….the answer is: they couldn’t….LOL

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  10. whatsmyname

    Tim, if you are looking for a correlation between interest rates and house prices, why would you adjust one number for inflation and not the other?

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  11. AMS

    Let’s assume that high interest rates are coupled with high inflation. Once again, this is our assumption, I am not suggesting that it’s true or false.

    With this assumption, let’s say you buy a home at a high interest rate. Well, this is ok, as you are paying high interest on an asset that is likely going up in value (This is a discussion that One Eyed Man has put forward several times, and while there is no guarantee that housing prices follow inflation, historically physical assets do well during periods of high inflation.).

    There is still the question of whether the home is going up faster than the interest rate.

    Aside from all of this, let’s talk risk. We have heard so many stories of people who were sold teaser rate mortgages. The idea was simple: Just refinance later at an even better rate. This theory was rooted in various claims, such as improved personal credit scores, falling interest rates (even though rates were at historic lows), and, as we all know, the idea that housing prices always go up, so why worry.

    Back to the risk. What happens if someone buys a home in a high inflationary period with a high rate? Is this person better off than someone who buys in a low inflationary period with a low rate? If inflation, and housing price appreciation, is lower than expected, then which one is better off?

    In summary, no matter how high the interest rate, if the home is going up in value by more than the interest rate, then the leverage is positive. Well, this is not technically correct, as we might want to consider opportunity costs and discount rates, but borrowing at 10% and buying an asset that’s going up in value by 11% is better than borrowing at 5% and buying an asset that’s going up in value at 3%. Borrowing at 10% is always worse than borrowing at 5%, all other things being equal. Thus the worst case situation, given the few cases presented here, is borrowing at 10% and buying an asset that’s going up by 3%.

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  12. Charles Miller

    First off, the original poster’s question was yesterday, Tim. I think you owe her and the rest of us here an apology for making us wait so long for a response.

    I’d like to echo the advice that’s already been given that “feeling pressured” alone isn’t necessarily a good reason to buy a house. That being said, I recently closed on a place after many months of looking (one that I really love, seems perfect for my family and I can easily afford) and one of the many factors going through my mind was looming specter of rising interest rates. I wasn’t sure what effect, if any, there would be from rising rates, or even if they would come, but I did know that there was a fairly high chance of uncertainty in the area of rates in the months and years ahead, and that rates are good now. I also think that it’s worth thinking about the compounding effect that raising rates might have if you apply the historical inverse relationship between rates and home prices to the lingering effect of a reeling real estate market. It could be huge, causing home prices to slump dramatically. In the end I don’t know, and to an extent didn’t care, because I love the place I bought.

    Taking a step back, the real issue shouldn’t be interest rates or home prices, per se, but rather affordability. It might be more affordable to get into a house if rates do go up, as many think they will. Among other things, how much money you will be putting down will insulate you, to an extent, from higher rates.

    Ultimately, the one factor that should consider is this: you should buy now or you will be priced out forever.

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  13. AMS

    RE: softwarengineer @ 9 – I’ve discussed negative inflection points regarding banks in the past. The duration is one factor to consider. Banks sometimes get trapped borrowing money at a high rate to cover the lower rate loans. Negative leverage!

    Those who underwrite mortgages must compute the economic conditions some 20-30 years out. The borrower can prepay the mortgage. In a period of falling rates, the borrower just keeps getting a better deal by refinancing. What happens when rates rise and banks are holding a bunch of low-rate mortgages, even if there is a low default rate with holding collateral values?

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  14. anonymous

    RE: Ira Sacharoff @ 8 – I wonder if part the reason 10 yr treasury yields wouldn’t track mortgages as well now is that most people get 30 yr mortgages as opposed to 10 or 15 year mortgages? Also there may be other issues leading to current volatility in the financial markets causing a weaker correlation. That and people aren’t sure they know what the mortgage backed securities are worth.

    The on topic part for this post is that long term higher long term inflation expectations lead to higher interest rates and high inflation leads to higher nominal house prices, which would work to counteract the effect of higher rates reducing affordability and pushing prices down. I wonder if that is why we aren’t seeing a strong correlation in the charts The Tim posted. I know that the charts are using real, inflation adjusted house prices, so maybe that doesn’t make sense.

    So, not much of a point to this comment I guess.

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  15. deejayoh

    By whatsmyname @ 10:

    Tim, if you are looking for a correlation between interest rates and house prices, why would you adjust one number for inflation and not the other?

    I agree. you can’t make that comparison. It’s not an assumption that inflation and interest rates move together – it’s a fact. And in the periods where you show home prices moving down and high interest rates – nominal home prices were probably moving up.

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  16. shawn

    RE: AMS @ 13 – I think I hear some crickets.

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  17. Jessica

    Tim,

    Thanks for responding to my post! The comments were helpful, and now I have some data to show my husband.

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  18. AMS

    RE: The Tim @ 16 – How about a chart that shows rate of inflation, in percentage terms, versus interest rates, in percentage terms?

    As far as adjusting interest rates for inflation, if you decompose the interest rate into factors, then you could identify the inflation premium. The problem is that market rates are the aggregate of various expectations, so the separation might be very difficult.

    Back to the offering a child one piece of candy before dinner or two pieces after. For some reason it’s been my experience that small children often take the one piece right way instead of two pieces later. While I can compute a rate of return that is given up to have the immediate single piece, what I have not been able to determine is whether the child is pricing risk or rate of return. I have a suspicion that the small children have a thought that I will not pay the two pieces after dinner, so a bird in hand is better than two in the bush… I have not figured out a way to separate the child’s perception of the risk of default. This is a bit easier if we make assumptions about credit scores being predictive. I have not defaulted on my promise to pay two pieces of candy later. Any idea on some experiment to separate rate of return from risk of default?

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  19. AMS

    RE: shawn @ 17 – I think I look forward to Bank Failure Friday!

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  20. Tim McB

    The Tim said:
    Two, if you do end up buying in a high interest rate situation, keep in mind that you can always refinance if rates go down later. However, if you end up buying in a high purchase price situation, then home prices go down later, you won’t have the luxury of refinancing into a lower principal balance.

    The Tim, I heard you make this argument in the past but using past data (your chart) I can many instances where refinancing will not be an option for many years. For example, if you purchased in 1974 for the prevailing interest rate of the time (7.0%) the earliest you could refinance is around 1993 by my estimation. 19 years. That’s a fairly significant time period of paying a higher rate. You can find instances where your claim may be true (say buy in 1970, refi in 1973) but it looks more likely that you’ll be waiting at least several years if not more to refiance if you do so at the prevailing rate. I think we take the recent (2000’s) zig zags in the interest rate market for granted. Also, as I’m sure your well aware loans are amortized so you have the highest rate at the most inopportune time (the beginning of the loan where you pay the bulk of the interest.). I’m not saying that there’s not validity to your claim but it seems to me anyway that it is not as clear cut as you make it out to be.

    As a point of reference my parents bought a house in West Seattle in 1979 as interest rates were really shooting up. They ended up assuming the loan of the previous owners (I’m not sure how they did this) to be able to afford the house since the prevailing rate at the time was over 10%. Otherwise it just wouldn’t have been feasible for them. I’d be interested in seeing the volume for that time period (1979-1986) My hunch is that very little was bought or sold around that time. Also looking at the chart I see that prices dropped in 1978 from 123(?) to 107(?) (-13%) in 1984 but rates jumped from 9% to almost 15%. Its seems like there’s not an inverse correlation there. That said I don’t think rates will jump until 2012ish, but I think we’ll see loan assumptions (if possible) again in a few years time as rates go up. Sorry for the long ramble.

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  21. anonymous

    RE: The Tim @ 16 – 8% in 1930 dollars is the same interest rate as 8% in 2010 dollars. I agree that Deejayoh and whatsmyname are just confusing themselves with the suggestion one number is inflation adjusted but not the other. The correct way to do the analysis to answer Jessica’s question is with inflation adjusted numbers, then think about inflation and nominal prices.

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  22. whatsmyname

    Tim@16

    You are making unnecessary, possibly incorrect, and not-the-point assumptions about affordability and how fast house prices move up in that scenario. Why do it?

    If you want adjusted numbers, but can’t find a history of “real” interest rates; you could estimate them by subtracting annual CPI. A better solution is to just use unadjusted house prices and nominal rates.

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  23. Scotsman

    RE: The Tim @ 16
    Just subtract the inflation rate from the market interest rate to separate out that part of the rate reflecting the supply/demand for money net of inflation expectations. It’s a bit crude, but may be interesting to see.

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  24. deejayoh

    By The Tim @ 16:

    By deejayoh @ 15:
    And in the periods where you show home prices moving down and high interest rates – nominal home prices were probably moving up.

    But clearly even if home prices were moving up, they were doing so more slowly than everything else (and probably more slowly than people’s ability to pay for a home), so that’s the same as moving down. How would you adjust interest rates for inflation anyway? That doesn’t even make sense.

    You don’t need to adjust interest rates for inflation (although there is the concept of the “real” interest rate if you wanted) – you just need to show nominal interest vs. nominal prices.

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  25. deejayoh

    By anonymous @ 22:

    RE: The Tim @ 16 – 8% in 1930 dollars is the same interest rate as 8% in 2010 dollars. I agree that Deejayoh and whatsmyname are just confusing themselves with the suggestion one number is inflation adjusted but not the other. The correct way to do the analysis to answer Jessica’s question is with inflation adjusted numbers, then think about inflation and nominal prices.

    I’m not the least bit confused. Try buying a house at the “real” price and let me know how that goes.

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  26. anonymous

    By deejayoh @ 27:

    By anonymous @ 22:
    RE: The Tim @ 16 – 8% in 1930 dollars is the same interest rate as 8% in 2010 dollars. I agree that Deejayoh and whatsmyname are just confusing themselves with the suggestion one number is inflation adjusted but not the other. The correct way to do the analysis to answer Jessica’s question is with inflation adjusted numbers, then think about inflation and nominal prices.

    I’m not the least bit confused. Try buying a house at the “real” price and let me know how that goes.

    RE: deejayoh @ 27 – Every time anyone buys a house it is at the “real” price. “Real” and nominal are identical in present time.

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  27. whatsmyname

    Tim@25

    Your chart is about historical fact, not conjecture. You could make that additional comparison by running a third line for CPI. However, that is no reason for avoiding an apples to apples comparison on the subject at hand. Again, why avoid the straightforward comparison?

    Let’s do a thought experiment. What would you think if someone were to post a comparison of real interest rates vs. nominal house prices for the past 60 years? How would that be less skewed?

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  28. Ira Sacharoff

    RE: The Tim @ 28
    So is that what time travel will amount to? Traveling back in time to buy property?

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  29. ARDELL

    A few thoughts:

    1) re interest rates “going up”…up from…uh subprime rates that fueled the bubble?

    The charts do not seem to match reality, as I believe they are graphing the lowest possible mortgage rate attainable. During the bubble years of massive home price increase, the “extra push” of increased home buyers came from people who were not eligible for those low rates. They were getting “exotic” loans with high interest rates of up to 8% on the first mortgage and 11% on the 2nd mortgage.

    The most common scenarios were approximately 5.5% on the first and 7.5% on the 2nd for someone with a good credit score but zero downpayment, and 6% on the first and 8.5% on the 2nd for someone with a low credit score. (approx. invite lenders to give accurate data)

    Comparing today’s 20% down conforming loan rate or even tomorrow’s 20% down rate to the lowest possible conforming loan of 2005 and 2006 is a false premise, since the fuel for the bubble was the subprime loan at much higher rates than we expect rates to become in the near future.

    Unless when you say, “we’ll look at King County home prices (inflation-adjusted using the CPI) and mortgage interest rates over the last 60 years.” you are talking about the rates people actually used (subprime) vs. apples to apples conforming loan rate first mortgages.

    2) One of the #1 issues impacting condo prices today is the recent past change in WA Statutes requiring a Reserve Study. I have run into more than a few cases recently where the dues went from almost $200 a month to almost $400 a month, once “insufficient reserves” was highlighted by the reserve study. The prices are immediately impacted when the “comps” sold with a $200 a month condo fee and now have to sell with a $400 condo fee. The change in price is not limited to the increase in monthly payment solely, as people cannot deduct the HOA fees the way they can deduct the higher interest if the same $200 was caused by a higher interest rate.

    3) FHA will be increasing its up front MIP (Mortgage Insurance Premium) cost from 1.5% to 2.25% on April 7, 2010. This cost is usually financed and stacked on top of the agreed upon purchase price, and that may cause prices to be pushed to less than negotiated price, at time of appraisal negotiation. They are also reducing the seller contribution from a max of 6% to a max of 3%. Not sure if that 3% max will include their own 2.25% charge, but if it does there will be little room for an FHA buyer to finance their closing costs. A buyer needing 3.5% down AND their closing costs would be a dramatic change. It’s possible FHA will allow the buyer’s costs to be “shifted” to the seller column on the closing statement vs. paid for by the buyer. I am already seeing this column shifting being required by the lender.

    4) A HUGE factor that I do not see written about often, that is dramatically impacting the median home prices, are the “loan limits”. It is well known that Pierce and Snohomish Counties are doing worse than King County. I believe that is because everything over a mortgage amount of $417,000 is a jumbo loan in Pierce and Snohomish with only King County having the advantage of a “high balance conforming” loan limit of $567,500. They tried to back that up to $506,000 just as the market was turning downward. Pressures were brought to bear causing the decrease to be rescinded. If we see that limit reduced, that one factor could decrease median sold prices more than increased interest rates.

    Sellers and agents are not as mindful of these limits when setting asking prices, as they should be. When most buyers want a mortgage of not more than $417,000 or not more than $567,500, the prices causing a mortgage to fall over those limits can be the difference between sold and not sold. You will likely find that the majority of homes sold fall in the $417,000 mortgage amount or less, and the 2nd highest volume tier falls in the “no more than $567,500″ range.

    If they increase the conforming loan limit at the same time that they increase interest rates (and there is talk of that in higher priced areas) a buyer will end up with a lower rate (conforming) even if rates go up. Trading down from jumbo loan rate to conforming loan rate in a period of increased rates, will actually have the net effect of lower interest rate.

    Many people who went out to buy a house in 2005 when rates dropped to 4.5%…but ended up buying with a subprime loan of 5.5% on the first and 7.5% on the 2nd. The “rates have never been lower!” ads got them out looking at homes. But most did not get that 4.5% rate (which is what I believe is used in the graph of this post).

    5) One of the reasons the Seattle Area reached bubble proportions, is that the Finance Contingency used during the subprime years (and now) does not have a “rate cap” as most areas have…and ours once did. Consequently if a buyer made an offer thinking the rate was 4.5%, they did not have a legal out when they found out the rate was 5.5% plus 7.5%. Traditionally a Finance Contingency will state a rate spread of say 4.5% to 5.5%, so that if the borrowers rate exceeds 5.5% during escrow, they can cancel on the Finance Contingency. Adding a rate cap to the Finance Contingency, and again most areas of the Country have this, will help protect buyers from rates increasing by giving them a legal out if that happens.

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  30. whatsmyname

    28 and 29

    Exactly so. So why are we using adjusted house prices instead of nominal prices???

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  31. AMS

    RE: Ira Sacharoff @ 31 – No, no, no! Travel back to the peak and sell.

    lol

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  32. deejayoh

    By The Tim @ 28:

    RE: deejayoh @ 27 – Doesn’t everyone only ever buy a house at the “real” price, since we can’t travel into the past or the future, and in the present, nominal is always equal to real?

    Your chart doesn’t show the price anyone actually paid for a house except for 2009. So it shows that people bought houses with “real” dollars but had to pay interest rates that included inflation. I’m not going to belabor the point any further other than to say that I think that the analysis could be improved by showing a nominal:nominal comparison, and also by showing what thecorrelation between the two lines to see how strong the relationship is vs. just highlighting a couple of periods that appear to show an inverse relationship.

    At the end of the day I think the impact of interest rates on home prices is a contributing factor – but not a huge one. Pales vs. income.

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  33. deejayoh

    RE: anonymous @ 29 – . Yes people pay the real price when they buy a house. That is not what this chart shows. It is accurate for only the 2009 purchase. You are making my point.

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  34. ARDELL

    Deejayoh,

    In the last period of rising and high interest rates, society compensated by turning into a Country where both parents worked (vs. one) to support those higher payments. Perhaps having two husbands or two wives will be the net compensating factor for future rate increases :)

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  35. anonymous

    By whatsmyname @ 33:

    28 and 29

    Exactly so. So why are we using adjusted house prices instead of nominal prices???

    If you were trying to study how much banks were charging over inflation over the last 50 years, you would want to subtract CPI from interest and compare it to prices.

    If you were trying to study how house price inflation differed from long term inflation expectations over the last 50 years, you would make a chart of nominal house prices vs long term interest rates.

    If you were trying to determine whether affordability concerns caused house prices to decline in real terms when mortgage interest rates rose, you would chart real, inflation adjusted house prices vs interest rates, which The Tim did..

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  36. AMS

    RE: Ira Sacharoff @ 31 – Here is another time travel idea:

    http://www.craigslist.org/about/best/stg/990546952.html

    Translated to real estate, one could go back a few years and warn people not to buy. But if we warned too many people, we’d need to go back further. Maybe someone with a time machine set this whole downward price spiral in motion?

    lol

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  37. whatsmyname

    Tim@38

    The purported purpose of the chart is to compare interest rates with home prices, not people’s ability to pay – Although you could help with that by adding a cumulative CPI line. And look how well things turned out. Now, don’t you feel better?

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  38. whatsmyname

    anonymous@39

    If you want to look at real estate in purely investment terms, you may want to use inflation adjusted values, but you would also want to look at real interest rates – apples to apples.

    If you want to see what happens in gross terms, you would want to compare nominal with nominal.

    You are otherwise only fooling yourself.

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  39. AMS

    RE: Jessica @ 18 – If it really were the right time for the two of you to buy, then both of you’d agree. Does he really want to force the purchase when you are not so sure?

    In the end, I am sure your concern is about the magnitude of the purchase relative to your financial situation. You’d probably quickly approve a $100,000 home purchase, but at $450,000 when you can rent a similar valued place at $2,000 per month it does cause some concern. Imagine if you were looking at $80,000 homes and qualify for the $8k credit. I’m going to guess that relative to your household income, $72,000 net would be an easy purchase decision.

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  40. AMS

    If there is going to be high inflation OR if there is going to be high housing price appreciation, borrow and buy a home.

    If there is some high inflation, then you pay back the debt with cheaper dollars, even if the home does not go up in value. Inflation impacts wages, interest rates, and so on.

    If there is going to be high housing price appreciation, then buying at a low price with cheap money is a good plan.

    If you buy at 10 times your annual income and prices go down 10%, then you’ve lost a year’s worth of wages. As always, there is interest, taxes, insurance, maintenance, and so on.

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  41. anonymous

    By whatsmyname @ 42:

    anonymous@39

    If you want to look at real estate in purely investment terms, you may want to use inflation adjusted values, but you would also want to look at real interest rates – apples to apples.

    Like I pointed out before, 8% interest in 1950 is the same interest rate as 8% now. It is the same. Your “real” interest of rate minus CPI tells you nothing but how much the bank is earning on the loan. $3000 dollars in 1950 was the average annual household income, and it was enough to live on for the whole year, including housing. Today it is more like a month’s income. $3000 in 1950 is not at all the same as $3000 today, which is why we inflation adjust dollars when making comparisons.

    interest minus CPI to “real” prices is not an apples to apples comparison. It doesn’t matter if you call them both “real”. Actual interest at the time vs the present value of the purchase price at the time is apples to apples.

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  42. AMS

    RE: anonymous @ 46 – Paying 8% when inflation is 8% is much different than paying 8% when inflation is 1%.

    Furthermore, paying 8% when inflation is 16% is very good for the borrower!

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  43. whatsmyname

    Tim@44

    If houses were to be worth 50X more in one year, it would make absolute sense to buy one now because of the leverage factor. It overcomes the effect of lesser returns on assets that I can not leverage nearly as highly. The 100X CPI would be bad for my lender, but good for me.

    I read the husband’s concern about spending more as a concern about the effect of higher interest on their monthly payment, not discounting effects of inflation.

    That said, I don’t expect a significant increase in rates in the near future.

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  44. anonymous

    RE: AMS @ 47 – So what do you think you would get if you graphed interest rates minus inflation over time? I think you would get a pretty constant number, since the banks will always try to charge you a few percent over inflation. What that percent is could go up or down a little over the last 50 years based on how accurate the bank’s guess at inflation is and how much profit they expect, but I’m not sure how it would answer the question at hand, which Tim repeated in comment 44.

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  45. whatsmyname

    anonymous@46

    The purported purpose was to look at the effect of interest rate changes on prices. While it is very true that $3,000 in 1950 is not $3,000 today, what we are looking for is the correlation of rate changes with price changes. The real rate does not tell you what the bank is earning (that is the spread). Rather it reflects the cost of capital – which is relevant to the return.

    I do think the question of whether the house value goes down in real terms is a relevant piece of information, but it is not definitive. See post 48.

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  46. Futurist

    RE: softwarengineer @ 6

    “What do you think the Pink Ponies all cringe when you mention interest rates going up….they know the monthly mortgage payments cannot go up, its impossible. That leaves only one thing to happen when interest rates go up with more debt; house price collapse inversely proportionate to interest rate increases. Its slamdunk.”

    I 100% agree with you. I would like to add that the larger geo-political scene directly impacts what is going on, and IMO there is no actual plan to bring the US economy back into prosperity. The debt-loaded US dollar is being intentionally collapsed since the end goal seems to be to forgive all debt globally and usher in a new UN-backed world reserve currency (based in CO2 credits) at the same time. The laws are already in place to take care of the details.

    Given this info, I would imagine there is a plan to raise interest rates rapidly which will cause many individuals to buy property out of fear. Once rates become too high to afford RE, the RE market will collapse entirely and mortgage owners will be tied to great amounts of debt that will NOT be forgiven. The bankers involved do not have a history of forgiving such debts. We may then see our retirement and pension plans raided to pay back some of this debt.

    In other words, I think you are better off renting for the next few years, given what the UN has up its sleeve, and also keeping in mind that the mainstream media is covering none of this, despite that most of what I mentioned is now information in the public domain.

    Be aware that gold and silver prices are going to be taken to extremely low levels to shake out the weak hands. This is purely intentional. When the chaos mentioned above begins to unfold, you will wish you possessed gold and silver. However, I fully expect debt to not be forgiven for a number of years, which will help put the repressive regime in place in preparation for the next move, which is something I will not cover here.

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  47. AMS

    RE: anonymous @ 49 – I covered this in part at #19. Given the complexity of interest rates today, how can we separate risk of default from inflation expectations?

    Then there is the issue of expected inflation versus realized inflation. We cannot agree as to what inflation is going to be in five years, so how do we know what to charge 20-30 years out, which is what I discussed in comment #13 (shawn at #17 heard crickets).

    I don’t have an easy answer, as interest, including the inflation premium, is based on future expectations, but inflation is computed based on historic observations.

    I will say this, however, if you ever wonder why an ARM is “cheaper” is because it shifts this risk from the lender to the borrower. The borrower always pays fair market value for the cash, and the lender is paid fair market value. This reduces the risk for lenders, and thus a lower rate. I am not sure why anyone would want an ARM when rates are at 50-year historic lows.

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  48. ARDELL

    RE: whatsmyname @ 48

    You said, “That said, I don’t expect a significant increase in rates in the near future.”

    I find that most home buyer’s definition of “significant increase” is very small. In recent history rates have fluctuated between 4.875% and 5.5% in a short period of time. For most people that rate of increase is “significant”.

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  49. AMS

    RE: ARDELL @ 53 – Probably true, but this illustrates how sensitive people are to ‘very small’ changes. An extra $25 per week in interest expense is the end of the world! How much can prices go up when consumers are hyper sensitive to ‘very small’ changes in interest rates?

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  50. anonymous

    RE: whatsmyname @ 50 – So take the chart of interest minus CPI that you have been asking for to compare to real home prices. If you overlay that on the graph, you will see that the interest rates minus inflation is some percent that varies over time. The bank takes part of that percent and maybe sells the rest of the loan as MBSs. What does that tell you that is relevant to the question we are asking here?

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  51. anonymous

    By whatsmyname @ 48:

    Tim@44

    If houses were to be worth 50X more in one year, it would make absolute sense to buy one now because of the leverage factor. It overcomes the effect of lesser returns on assets that I can not leverage nearly as highly. The 100X CPI would be bad for my lender, but good for me.

    So if you paid maybe $400,000 cash, with which you could have purchased 100,000 premium loaves of bread, the house at 50X price would be worth $20 mil. After the 100x CPI, that $20 mil would only get you 50,000 loaves of bread. You have lost value.

    But you are probably talking about borrowing to buy. If the lender charged 5% you would have made a killing. However, if the lenders and their backers expected 100X CPI, they would charge you around 11000% interest, and you would now owe $44 mil on a $20 mi house, minus whatever payments you made and reduced interest from that. You are still behind.

    So yes, if you are sure interest rates are much lower than what inflation is going to be, it makes sense to leverage. But there is a tremendous amount of expertise and time spent coming up with those interest rates to make sure the lenders don’t lose money on inflation. Are you sure you can out guess them? With leverage there is a whole lot to lose if you guess wrong.

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  52. softwarengineer

    RE: Futurist @ 51

    And We All Mostly Vote Our Pocketbooks

    Hades, even Glenn Beck was involved in gold investment advice tied to his own radio commercials.

    My take on the future is very foggy, we may likely see some surprises as it all unfolds.

    Take this scenario, we’re in a severe chronically worsenning recession/depression and food production is limited because most wages are butcher axed shutting energy consumption down for food production….what good is money, hades what good is gold? The farmer with eggs, milk and vegetables has all the 18K treasures, just like the Great Depression in history BTW.

    I would also add, what good is real estate equity if that worst case scenario happens….ya can’t eat it. Hades, if the bank doors are closed, real estate will go for small bags of cash or gold outside of banks…..so what, you can’t eat it.

    Today’s overpopulation would make it far worse than the last Great Depression too, we’re out of fish….better keep an eagle eye on your cat or dog….one day they’ll disappear if you don’t keep a tight leash?

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  53. whatsmyname

    anonymous@55

    The overlaid graphs would show you if changes in real cost of capital are closely followed by changes in prices for homes, and in what direction, and to what degree, and how consistently. Remember, my preference was for nominal/nominal numbers. I just think that you want to analyze numbers on a consistent basis. Otherwise, GIGO.

    I am not recommending that anyone either buy or not buy a house.

    Ardell@53

    I will grant you that buyers see big changes within small tolerances. I am guessing without much authority that rates will continue to fluctuate in that area with some unquantified <1% bias to the upside. My meaning is that after recommending "buy" in Tim's high inflation scenario, I am not recommending people buy in real life in order to escape higher rates in 10 or 12 months.

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  54. whatsmyname

    anonymous@56

    Oh dear, now we are being silly? Tim’s scenario is what it is. The parameters are buy now (we know what current rates are, yes?) Then we have a miraculous inflation at 50X for houses and 100X for CPI. The leverage is explicitly mentioned in the paragraph you quote. Let’s say I buy that $400,000 house today with a whopping 25% down at 6%. Next year, my $100,000 investment plus $18,000 interest has me in a house worth $20mm with a $300,000 mortgage. You have 50,000 loaves of year old bread worth approximately $0. At least I will be able to outguess you.

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  55. ARDELL

    RE: AMS @ 54

    People’s rate “tolerance” is impacted by the fact that lenders tend to qualify them at max price based on today’s rate. When they do that, and people make an offer at that max price, a minor increase in rates can push them from “qualifed” to “not qualified”. That is why you see more and more pendings failing over lending issues when rates move up slightly.

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  56. Hello

    I read this article few weeks ago: http://patrick.net/housing/crash.html
    It has an interesting view on home prices vs interest rate.
    Check out #3 on the list on the page.
    It basically says, given the choice of “high price/low interest” vs. “low price/high interest,” you have to go with the latter.

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  57. LA Relo

    I didn’t read every response, and I’ve read arguments for and against the trending of prices to the LIBOR, FFR, 10-year, etc. before.

    IMO the bottom line is rates will go up.

    Why?

    First of all, they can’t go lower.

    Second, the US$ is in the crapper and our owners are going to start demanding better returns.

    Third, even if all other rates stay the same, mortgage rates have been kept artificially low buy the Fed buying mortgages, which is about to end.

    It will hurt people who bought a house with an ARM when rates were at their lower point in history (hindsight is 20/20 I guess. That eventually reduce home values, because fewer will quality, more will foreclose, and inventory will increase. Simple rules of affordability. Those rules however, got out of whack this last cycle, and rates/prices were basically irrelevant.

    All people cared about was a low monthly payment.

    Personally, I welcome this. If your monthly payment is the same I’d rather have a higher interest rate than a higher principle. Since I can’t have both, that is.

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  58. anonymous

    RE: whatsmyname @ 58 – The postulate here was that high interest rates would negatively impact real prices because affordability (ie monthly payment /income) is limited. IOW, a relationship between interest rates paid by the consumer and price relative to income is what we were looking at here. If you take out the adjustment for inflation, there is nothing to account for the income change.

    If you think there is a relationship between real cost of capital and home prices, that is a different analysis. There is nothing inconsistent about comparing interest rate paid by the borrower with inflation adjusted price.

    I think the real thing you are not getting here is that subtracting inflation from interest is not the same as taking the present value of past prices. You can call them both “real”, but it is not the same thing, and using the prices in 2009 dollars does not require you to only look at real cost of capital as opposed to % interest paid by the consumer. If I was comparing real income over time vs nominal price, that would be GIGO, but actual interest vs real price is legitimate, provided that is the data you are looking for.

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  59. whatsmyname

    anonymous@63

    I think I see what you are trying to get at. However, I disagree about the postulate here. The simplest question posed by the home looker is whether increased rates will result in decreased prices. The approach was to see if there is historical evidence supporting this theory.

    Therefore, we want to compare the relationship of the deltas. From this I would infer a nominal/nominal comparison is easiest and cleanest. Using inflation adjusted prices, but not rates will distort the relationship in periods of differing inflation rates. See AMS post 47.

    I think it is a mistake to jumble in potential causation factors such as affordability before establishing the relationship itself, and only leads to confusion.

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  60. whatever

    Even though interest rates were sky high in the late 70’s early 80’s (15+%!), assumable loans were very popular during this time period so a lot of home buyers were not affected by high rates.

    My mother purchased a house in ’79 when rates were hitting around 14% so she just took over the home owner’s mortgage which was only 5%.

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  61. AMS

    By whatever @ 65:

    My mother purchased a house in ’79 when rates were hitting around 14% so she just took over the home owner’s mortgage which was only 5%.

    And just like with any bond, with a quick computation on discounting the future cash flows, we could compute just how much the holder of that mortgage lost in value when yields went up.

    Of course there are other factors, such as not holding the mortgage to maturity, including paying it off early and default. Who pays 5% money off early when the going rate is 14%?

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  62. anonimaniac

    RE: ARDELL @ 38

    You got it backwards, Ardell. The two income family drove up asset prices, schooling prices, etc. Check out this: http://www.amazon.com/Two-Income-Trap-Middle-Class-Parents-Going/dp/0465090907/ref=sr_1_3?ie=UTF8&s=books&qid=1265756270&sr=8-3

    More more money chasing assets and resources = price inflation. Simple economics.

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  63. AMS

    RE: anonimaniac @ 67 – I didn’t check the book out yet, but the basic claim is:

    Two workers instead of one => More more money chasing assets and resources => price inflation. And you cite, “Simple economics,” as the reason.

    How about:

    two workers instead of one => twice the production => twice as many assets and resources => twice the dollars chasing twice the resources => no price inflation.

    If you have two workers being paid for the same production, yes, there will be added dollars chasing the same amount of goods.

    You assumed the second worker added too few goods or services to the economy; I’ve assumed constant efficiency, and thus the marginal output of the second worker is exactly the same as the first worker. Ideally the second worker would add efficiency based on Adam Smith’s Wealth of Nations.

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  64. David Losh

    Did any one look at the chart or did the math kind of take over?

    The price of housing units did increase with inflation which pushed up interest rates. The rise in interest rates was to cool down the economy and keep inflation in check.

    We are in a much different situation today. The opinion I’ve formed is that we have had a false sense of inflation due to easy credit. People paid higher prices because those payments were so darn affordable.

    If the money we borrow becomes more expensive then those prices will need to come in line with affordability. That’s the simple answer. The more complex issue is if, as the foreclosure rate increases, will the price of housing units decrease.

    A thought I had today was that in the near future banks will be giving away a house for every new checking account you open.

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  65. ARDELL

    RE: whatever @ 65

    You raise an important point for today’s homebuyers. FHA and VA loans have an assumable rate,. Conventional mortgages are traditionally not assumable. Consequently if someone is buying today and can pay 20% down and get a conventional loan, if they think interest rates will rise by the time they sell, it may be better to do a minimum down FHA so that the buyer of the home in the future can assume the mortgage.

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  66. ARDELL

    RE: anonimaniac @ 67

    When interest rates came down and people refinanced their 17% mortgages, they didn’t go back to being “one income families” but rather did as you say with their “extra” money. So my original premise isn’t “backwards, it simply only held true while interest rates remained in the double digits.

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  67. shawn

    RE: AMS @ 20 – btw, I did not mean this blog was quiet, but that when anyone asks SWE to address his claims, I start to hear crickets.

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  68. shawn

    RE: softwarengineer @ 57 – It is nice to see softwarengineer chooses to reply only to those who agree with his vociferous promulgations while steadfastly ignoring those who request he actually address his assertions, as AMS did.

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  69. Ira Sacharoff

    David Losh said “A thought I had today was that in the near future banks will be giving away a house for every new checking account you open.”

    Or maybe you could choose the toaster instead.

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  70. AMS

    RE: ARDELL @ 60 – I don’t drive my car at wide open throttle. Maybe it’s because it may stick wide open? lol. But seriously, why do people red line their personal finances?

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  71. ARDELL

    RE: AMS @ 75

    I don’t understand that in response to my #60 comment. Can you try that again?

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  72. AMS

    RE: ARDELL @ 76 – People are approved for $500,000 (round number, scale accordingly). So they go out and make an offer for $500,000, which gets accepted (they max out, or red line). Next they find out there is some small change, and boom, it all blows up.

    Why not go a little easier on the personal finances, and throttle back a bit, and find a place that’s $450,000, so there is a bit of buffer room?

    In other words, buyers seek to max out their ability to pay. Then when postage goes up by a couple cents, we hear them cry.

    Ultimately it comes down to this:

    Income less expenses = potential buffer, or savings.

    Why do so many maximize expenses?

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  73. ARDELL

    RE: AMS @ 77

    I think because they don’t get to “keep the change”. If I give you $100,000 and say “go buy a car, and keep the change” you may buy a $30,000 car. If I say you DON’T get to keep the change, you will buy $100,000 car.

    They see that pre-approval like an amount someone will give them, and if they spend less than someone will “give” them, they are leaving money on the table. Just noting by observation, not saying it’s a “correct” way of thinking.

    People make fun of “payment” buyers. But they are better off than “pre-approved amount” buyers, most times. Especially if they set their own “affordable” monthly payment limit and refuse to go over that number.

    Most conservative is two income household buying on only one income, after saving one of the incomes for a long time for a large down payment.

    Often one wants to make the other happy, or they want to make sure the kids have all the things they didn’t have. Lots of emotion in the mix.

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  74. MooseGH

    RE: AMS @ 75

    To keep up with the Jonses, of course. (where is he, anyway) I always enjoy the dual income family discussion. Nowadays that most households have both spouses working, does anyone really belive we’re now better off than we were 50 years ago when only one spouse worked (in general)? It just goes to further my opinion that all of the US should go to a mandatory 1 wage earner household and a 2 day workweek. If we all do this as legally required, our purchasing power and quality of life should remain unchanged, correct? OK, that’s a bit tongue in cheek since globalization would certainly ruin it (just as it’s going to ruin what QOL we have remaining).

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  75. Futurist

    I think you people need to take a step back and look at what is happening around you, and then try to assess the situation accordingly… going deep is not as important as taking into account the macro-picture right now…

    Estulin: G-20 Meeting in Scotland this Week about Dumping U.S. Dollar
    http://dprogram.net/2009/11/03/estulin-g-20-meeting-in-scotland-this-week-about-dumping-u-s-dollar/

    “Estulin first reported on this initiative as being deliberated at the most recent Bilderberg meeting held in Greece in May 2009. Estulin says that the success or failure of this callous plan hinges on the ability of the US and UK representatives to convince the Russian, the Chinese and other national governments to go along with their scheme.

    Estulin maintains that if the co-conspirators succeed, such sudden devaluation of the US dollar would result in the sinking of the world economy through a chain-reaction collapse of the entire world’s financial system. As discussed during the Bilderberg Group’s super-secret conclave back in May, this breakdown would then be used as an excuse to launch a new world monetary system. G20 leaders are aware that those who run the monetary markets, the monetary system, control the world. That is why today, the world is run through a dominant one-currency monetary system and not by national credit systems.

    A severe breakdown crisis would affect every corner of the world and be a prelude to instability, wars and general hostility along financial, geographical and geopolitical lines, affecting not only particular countries but also societies, cultures and whole continents. Such a breakdown could result in a consolidation of the world’s monetary system.

    Estulin declares that the creation of the new world currency is the true meaning of globalization, which is nothing but an empire. It is the elimination of the nation-state, the degradation of individual national liberties and the depredation of civil rights.

    Collapsing the US dollar, first of all, is an assault on the structure of the United States economy toward the creation of a “World Company.” This concept, Estulin states, was initially discussed at the April 1968 Bilderberg Group meeting, held in Canada at Mont Trembland, by George Ball, a senior Lehman Brothers banker and former undersecretary for economic affairs for Presidents John Kennedy and Lyndon Johnson.

    The aim of this World Company, as explained by Ball was “to eliminate the archaic political structure of nation-state” in favor of the more “modern” corporate structure. Ball also called for further political integration in Europe, and then the rest of the world, as a precondition for expanding the power of a World Company, thus putting the financiers on the same levels as governments.

    This initiative, the moving away from the US dollar as a world currency, is the true intention of the G20 meeting November 6-7 at St. Andrews in Scotland, the site of the 1998 Bilderberg conference, Estulin asserts.”

    Dollar’s dominance to be challenged at G20 summit
    http://news.xinhuanet.com/english/2009-03/26/content_11079095.htm

    “BEIJING, March 26 (Xinhua) — As the global financial crisis continues to bite hard, the dominant position of the U.S. dollar is under widespread doubt. That has prompted major economies to issue a series of international financial market reform proposals challenging the U.S. currency.

    Discussions at the upcoming G20 summit in London also may herald a weakening of the U.S. dollar’s status and a far-reaching change of the global monetary system.

    Incredulity over U.S. leadership of the world’s finances has been accumulating ever since the spreading economic turbulence was linked to the American government’s financial policy failure and lax control of its domestic financial market.

    The unease was aggravated when the U.S. government decided recently to strengthen its bailout efforts by turning on the “cash-printing machine,” which will inevitably further depreciate the dollar and undermine its reserve currency status.

    Calls for a reshuffling of the international financial and currency systems are gaining momentum not only from the euro zone, but also from developing nations such as Brazil, Russia, India and China — known as the “BRIC” countries.

    Zhou Xiaochuan, China’s central bank governor, published two articles earlier this week, pointing out defects and systematical risks in the current international currency system. Zhou’s articles also call for creative reforms to improve the system.

    Zhou said the ongoing financial crisis is a testimony to the inherent deficiencies of the world’s current monetary system, and proposed to create a super-sovereign reserve currency as part of the reform.

    In a clear reference to the U.S. dollar, Zhou said the desirable goal of the international monetary system is to “create an international reserve currency that is disconnected from individual nations and is able to remain stable in the long run, thus removing the inherent deficiencies caused by using credit-based national currencies.”

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  76. Futurist

    And, to put the cherry on the cake, China is now moving forward with the plan…

    http://www.zerohedge.com/article/china-dumping-begins-reserve-managers-notified-any-non-usg-guaranteed-securities-must-be-div

    If the average Joe in this country understood what is happening, our housing market would be crashing right now. This is all going down right now. What we should be discussing is the TIME FRAME. The US dollar is TOAST already. 100% guaranteed.

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  77. Mikal

    RE: Futurist @ 81 – I had also read that Santa Claus is also for a one world curremcy. Does anyone know what the Easter Bunny and Tooth Fairy are for?

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  78. David Losh

    RE: Futurist @ 80

    “This concept, Estulin states, was initially discussed at the April 1968 Bilderberg Group meeting, held in Canada at Mont Trembland, by George Ball, a senior Lehman Brothers banker and former undersecretary for economic affairs for Presidents John Kennedy and Lyndon Johnson.”

    Those were the days my friend that never end.

    We are closer to that one world global economy. In the end that may be what we get, we may get a Lehman Brothers kind of global currency that is as worthless as the United States dollar.

    The part you are missing in the conspiracy theory is the New World Order. That’s where the global governments control the masses with military might. China, Russia, the United States, along with all the other nuclear power countries will control the globe with well fed armies.

    Uh oh, a bunch of under funded people of Arabic decent just blew up the World Trade Center and are kicking the carp out of the most powerful, fully equipped army on earth, the United States. It’s kind of like the Vietnamese did in the 1970s, or was that half a dozen other small Republics with war lords, or drug lords, or any one who can organize some armed people anywhere in the world.

    What’s funny is that now the Republicans are blaming the rules of military engagement for a lack of winning a war. It could be that or the lack of conviction.

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  79. softwarengineer

    RE: shawn @ 73

    Thin Skinned

    Some folks can’t stand to hear anything that makes their debts look like jokes….LOL

    Even if it was true.

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  80. Futurist

    RE: Mikal @ 82

    Mikal — Prove me wrong. That is, prove to me you know how to conduct any level of research to support your argument.

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  81. AMS

    RE: Futurist @ 85 – Gosh, I was hoping you’d prove Mikal wrong. Specifically, I was hoping you’d scientifically show that Santa Claus isn’t for a one world currency.

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  82. Mikal

    RE: Futurist @ 85 – On Santa Claus? You are the one making assertions that just seem way to conspiracy theory. The only point to really make is that everyone wants to make money. There would be to many people involved to make something like that work without some of them hurting. Therefore, it is just to silly an argument for me. I do think that many of these countries holding the US long term debt are starting to wonder about the plan or lack there of for the future. It is both parties faults.

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  83. Ron Nelson

    ARDELL-

    I have read.. a Lot of your insightful writings- your Very Good..
    In-fact you’ve brought up a very interesting point.
    Fact is what difference does it make, You can always find someones Loan to Assume.
    Wish I Was as good as you and Scotsman in Writing.

    Scotsman hits the Head of Nail almost every time…

    ARDELL Nice Point~!!
    You raise an important point for today’s homebuyers. FHA and VA loans have an assumable rate,. Conventional mortgages are traditionally not assumable. Consequently if someone is buying today and can pay 20% down and get a conventional loan, if they think interest rates will rise by the time they sell, it may be better to do a minimum down FHA so that the buyer of the home in the future can assume the mortgage.

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  84. Ron Nelson

    Point is if your Worried about Interest Rates going up.. Just look for A seller which is motivated enough to let you assume “Take control of his/her loan.
    Why deal with a Bank if you can find cheaper money elsewhere??

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  85. derek

    Tim,

    can you update these graphs showing exponential scales? I think that gives a better view of house price declines during rising interest rates — especially when looking back that far into the past.

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  86. David Losh

    RE: Ron Nelson @ 89

    The problem is the face value of the Note compared to the actual value of the property. Ardel thinks that home prices have bottomed out. If that were true, every one would be better off assuming a loan to amortize down the principle balance.

    So in the future this will become a more common practice, and more desirable. In the mean time, I think most people realize that home prices have to come in line with what people can afford to pay in an over all debt strategy.

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  87. Ron Cohen

    Over the next few years, home prices will eventually start going up, and will do so for the same reason interest rates will go up: increased economic activity, more people working, more wanting to buy homes. Increased demand for money, and for homes, will put upward pressure on the cost of both. Given the depth of the recession, we should not be surpised if this happens by fits and starts, with some backsliding along the way. There will also be different outcomes in different parts of the country, reflecting local conditions.

    As a Realtor, I tell my buyer clients they should NOT feel pressured to buy a home, whether to meet the tax credit deadline, or to get a jump on rising interest rates. (In some cases I actually discourage people from buying when I don’t think they’re ready.) But I also caution that it would be feckless to ignore such issues altogether. They key is to keep these externalties in perspective, and include them among all the other factors — personal and financial — that should be considered in making a decision.

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  88. Rising Mortgage Rates — Will They Further Depress Home Prices? « Boston Real Estate Maven

    [...] Ellis over at Seattle Bubble has thoughtfully graphed the two variables, rates and prices, over time (see chart). I’m not [...]

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  89. Will Rising Mortgage Rates Further Dampen Home Prices? | Boston Real Estate Trends

    [...] Ellis over at Seattle Bubble has thoughtfully graphed both rates and prices since 1950, highlighting in yellow two extended [...]

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  90. Interest Rates SKYROCKET! Everybody PANIC! • Seattle Bubble

    [...] side of the equation… If buyers have less purchasing power, won’t that just put more pressure on home prices to keep coming down to a point where the qualified buyers can afford them?Nah, that would never happen.Posted in [...]

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