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Friday, February 11, 2011

Housing Going To Zero? Interest Rates Over 5% Will Force Home Prices Down Even More

Mortgage interest rates are now above five percent.  This threatens to be another source of downward pressure on home prices.  The Wall Street Journal speculates on this today...just as we predicted back on October 6, 2010 with our post, "The Coming Housing Price Crash."

Rising interest rates directly and negatively affect affordability as measured by the ability to make a given monthly payment.  (Rising home insurance rates and fees, and property taxes, all of which are typically bundled together in monthly payments, will have the same impact but the source will not be as obvious.)  A lower monthly affordability ceiling translates directly to a lower mortgage loan amount the bank will grant, hence directly and unavoidably forcing prices down.  (This is the exact opposite of the effect of historically-low interest rates during the housing bubble between 2002-07.  Same principles, but now you'll see it work in reverse.)

We predict that the current slowdown in foreclosures, owing to allegedly massive bank screw-ups (that's really the best way to put it), will simply push the "overhang" of housing supply into the future.  A growing supply of for-sale houses in, say, the third quarter of 2011 will be yet another strong reason for housing prices to remain depressed, if not continue a significant decline.  (Reminder:  As with politics, with housing, everything is local.  Some markets are strong -- others are incredibly weak.)

Eric Dixon is a New York lawyer.  Mr. Dixon specializes in legal matters and consults with clients on strategic matters, litigation stress management, crisis management and assertiveness training.  Mr. Dixon is available at 917-696-2442 and via e-mail at edixon@NYBusinessCounsel.com.


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