The Housing Market With Increasing Interest Rates
The housing market was slightly down, but relatively stagnate in 2011. The housing market has become increasing segmented, (meaning some areas are showing very small gains while others are still showing giant losses) and many people are wondering if now is the time to buy. My opinion? If you are looking at a house as an investment or way to “save”, you should stay out of the housing market.
Let me first say that I am a home owner. I own a home that was recently appraised for $160k and I owe about $117k on the mortgage. I have not paid down the mortgage what so ever, but I have basically completed a very costly rehab of the house. I have skin in the game, which is why what I might say next is relatively shocking.
The housing market might be doomed. I believe the housing prices will not increase and could even decrease in most areas of the nation for anywhere as long as 5+ years. The bottom line here is that we haven’t bitten the bullet of how bad the housing market really is right now.
One of the biggest threat we have to housing is interest rates. A 30 year fixed mortgage loan is at roughly 3.9% today. Many people might find current interest rates as exciting, but to me it’s terrifying. Interests rates are bound to increase and just for the record – I’m aware increasing interest rates are usually a good sign of economic growth.
Let’s assume you purchase a $200,000 home today @ 3.9%. You payment would be: $943.34 a month for the mortgage alone. Now let’s say the economy picks up and interest rates go up to 6% – Now suddenly your payment is $1199.10 ($255.76 more / 27.1% more). To keep that $943.34 payment at the new rate of 6%, your house would have to have a selling price of $157,342 (-$42,658 / –21.3% of your home’s value) .
Now you could be quick to assume that because of the interesting interest rates, that means a better economy and more jobs, but do you really think things are going to go back to they way they were? If anything we have a glutton of homes, a young population that doesn’t want to own (or can’t), a ton of foreclosures in the pipes, and an aging baby boomer population that will soon be selling their homes for an easier lifestyle (condos / assisted living), adding to the already excess inventory. There are a lot of things holding the market down that could actually making housing prices worse regardless of increasing of interest rates.
Housing has to return to what it simply is, a place to live.
I read articles and blogs talking about how it is “now cheaper to own than rent.” Are you kidding me? It is only logical that it is cheaper to own than rent. Just think about what you are doing, you are locking a large sum of your liquid cash in a down payment, you are committing yourself into a home and a community, and you are subjecting yourself to potential losses if your community or the housing market in general continues to fall, and did I mention that you just lost 6% of your home’s value the minute you sign the paperwork and your closing costs?
The housing market has a heck of an uphill battle. I know the Fed has promised to keep interest rates where they are for at least 2 more years, but if they increase the rate before a real recovery – You are going to see massive losses across the board in the housing market. Did I also mention that you need the housing market to go up with inflation just to break even, so every year it’s stagnate is effectively another loss?
I’ve said it before and I’ll say it again – without the $8,000 incentive I received for buying my home – I wouldn’t have seen it as a viable option. It appears the the days of free money for buying a home are over, at least for now.
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