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Could Interest Rates Affect House Prices?
My guess is that they can and will, but the NYT doesn't seem to agree. In a bit over a month, the 10-year treasury rate has gone from around 4.6 percent to more than 5.25 percent. This rise will be passed on almost one to one in higher mortgage rates. With many people already stretching to the limits to buy homes at their current bubble inflated prices, my guess is that this rise in rates, if it sticks, will be a huge hit on an already weak housing market.
The NYT did not mention the potential impact on the housing market in this discussion of the surge in interest rates.
--Dean Baker
COMMENTS (9)
This was reported on Bloomberg today:
"Since the start of the fiscal year on Oct. 1, the budget deficit totaled $148.5 billion, down 35 percent from a shortfall of $227 billion a year earlier."
http://tinyurl.com/3cg2wh
Of course, this is a lie.
On September 29, 2006, our total debt was 8,506,973,899,215.23.
As of June 12, 2007, our total debt is 8,846,985,221,345.57.
Our current fiscal year 2007 budget deficit is now 340 billion.
When Bush entered office on January 1, 2001, our debt was 5,662,216,013,697.37 which took the US some 200 years to accumulate.
Bush/Congress accumulated 3.3 trillion in debt in just 6.5 years.
No amount of deficit/debt matters.
Why not increase debt 3.3 trillion a year or a month or a week or a day, What does it matter?
Posted by: jill | June 13, 2007 10:25 AM
Jill, the 'budget deficit' is a term of art, and therefore doesn't mean anything remotely like 'the net extra debt acquired by the US government' year over year.
The budget deficit only reflects things 'on budget,' omitting anything that is considered emergency spending, such as the entire Iraq war spending so far. Yes, we borrowed and spent the money, and yes, it caused extra debt, but the spending category is excluded from the 'budget deficit' calculation altogether.
And every dollar of current trust fund surplus creates another dollar of debt obligation, creating further debt from positive net cash flow. This too adds to the total debt, but isn't part of the budget deficit calculation.
Posted by: sofla | June 14, 2007 3:41 PM
Aside from the hit on new home sales, rising interest rates ensure that adjustable loans will continue to adjust up, up, up. Which conceivably could lose some people their homes, but would more definitely make a dent in household/disposable income. And thus the economy as a whole.
Houses are still moving in our area, but I see a lot of "price reduced" signs, especially in housing developments and on individual spec-built new homes.
Posted by: Bob Dobbs | June 15, 2007 3:40 PM
New and existing home sales are considerably down in Tucson, while the median price is down just a little. I am interested to see just how long these unsold homes must accumulate before sellers resistance begins to crack and then crumble. It is refreshing to see yields going up, finally! I don't think the much needed correction in residential real estate is going to happen until mortgage rates come into line with the fed funds rate. I don't think the spread between 6.3% (30 year fixed) and 5.25% can be sustained for low. Is this a reflection of a relatively strong mortgage-backed securities market?
Posted by: Jim Hannley RIA | June 19, 2007 7:26 PM
What effect might the apparent difficulties of at least one hedge fund (a Bear Sterns hedge fund) which apparently had invested in CDOs which apparently included securitized mortgages--am I using the terminology correctly? If some more hedge funds experience "difficulties" and the market for resale of mortgages decreases as a result, what would the effect, if any, on the residential housing market?
Posted by: azurite | June 21, 2007 9:08 PM
Bob, that is exactly right ... and a large portion of the Adjustable Rate Mortgages that are resetting are in the sub-prime end of the market.
Where this is going to really hammer the market is in volume ... if there are a large number of foreclosed properties up for auction, new construction at the bottom end of the market could dry up for an extended period in heavily hit regions.
Median prices could well rise, if the bottom end of the market collapses even further, but a price rise on a strong reduction in volume spells a further decline in total spending on residential construction.
Posted by: BruceMcF | June 23, 2007 11:41 AM
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Posted by: Anonymous | June 25, 2007 9:07 PM
As I understand it, the effects of a rise in interest rates on house buying are fairly well known.
The NYT discussion that the link you provided lead to may not have gone into any depth on the subject of the effect on the housing market, but they did mention it.
"In the United States, investors had believed the slowing housing market would prompt the Fed to cut short-term interest rates." -- from paragraph 18.
"...rising rates would mean consumers who are refinancing or buying a home will have to spend more of their disposable income on monthly house payments than they have been." -- from paragraph 23.
Perhaps the link you provided no longer goes to the same page you were referring to. If so, is there some way of providing links which are more permanent?
Posted by: Hobbes | July 2, 2007 6:40 AM