The impact of Irvine home prices if 30 year fixed mortgages rise up 7%

[panda]

No one has a crystal ball, but mortgage rates have been falling for 30 years since its last peak in 1981. Some people believe that mortgage rates will continues to go down to 3.75% in the years ahead. I've recently taken some short position on treasury bonds thinking that rates will rise here shortly. I never understood why there are so many cash buyers in Irvine where borrowing costs are so cheap right now. I would borrow 80% of the home value with a 30 year fixed even though i was capable of paying in cash.  Unless the United States declares bankruptcy like Greece.. I dont' see a sudden spike in mortgage rates, but see a more gradual increase in rates in the years ahead. Perhaps 7% by 2014-2015. I wonder if homes prices in Irvine would stay flat or slightly decline with a gradual increase in mortgage rates? I've thought about financing with the 5/5 or the 7 year ARM, but if i am correct that mortgage rates rise from here, I want to finance everything with a 30 year lock and hold the property for a very very long time.

When the herd expects and thinks that QE3 is guaranteed, I get more and more cautious and run to cash. With the USD dropping from 89 to 75 due to QE2. Cash seems to be only asset class I like right now.

Another thing I've noticed that is different from now and 1980 is that Gold prices peaked at $850 when rates were soaring at 16%. Today gold is at $1500/ounce with all time low rates. So many people say that the 1980 hyper-inflation is exactly what we will see today... but I am not 100% convinced.

Do any of you remember what the money market rates were in the 1990s? Were you able to get a 7% return on your cash?

 

[irvinehomeowner]

I never understood why there are so many cash buyers in Irvine where borrowing costs are so cheap right now.

Do FCBs have established credit? That's one reason you might need to buy all cash.

I wonder if homes prices in Irvine would stay flat or slightly decline with a gradual increase in mortgage rates?

You know my take on this... others feel they will decline proportionately... I just can't see that.

 

[edhne]

No one has a crystal ball, but mortgage rates have been falling for 30 years since its last peak in 1981. Some people believe that mortgage rates will continues to go down to 3.75% in the years ahead. I've recently taken some short position on treasury bonds thinking that rates will rise here shortly. I never understood why there are so many cash buyers in Irvine where borrowing costs are so cheap right now. I would borrow 80% of the home value with a 30 year fixed even though i was capable of paying in cash.  Unless the United States declares bankruptcy like Greece.. I dont' see a sudden spike in mortgage rates, but see a more gradual increase in rates in the years ahead. Perhaps 7% by 2014-2015. I wonder if homes prices in Irvine would stay flat or slightly decline with a gradual increase in mortgage rates? I've thought about financing with the 5/5 or the 7 year ARM, but if i am correct that mortgage rates rise from here, I want to finance everything with a 30 year lock and hold the property for a very very long time.

When the herd expects and thinks that QE3 is guaranteed, I get more and more cautious and run to cash. With the USD dropping from 89 to 75 due to QE2. Cash seems to be only asset class I like right now.

Another thing I've noticed that is different from now and 1980 is that Gold prices peaked at $850 when rates were soaring at 16%. Today gold is at $1500/ounce with all time low rates. So many people say that the 1980 hyper-inflation is exactly what we will see today... but I am not 100% convinced.

Do any of you remember what the money market rates were in the 1990s? Were you able to get a 7% return on your cash?

Panda, wasn't the inflationary problem one from the 70's not the 80s. It seems so much of bond markets pricing is really driven by credibility of the Fed to fight inflation. So gold might have peaked from its momentum until Volcker took over in the 80's and regained market creditability for fighting inflation with crazy high interest rates. If this is to be believed and inflation is coming back, then gold probably has more room to run before it "peaks" ahead of the next interest rate cycle perhaps.

One major difference between the 80s and now is the global glut of savings. This global glut of savings has been driving down interest rates across the world. In the Economist, there was some crazy stat that China alone could buy all the debt of all the "PIIGS" nations and it wouldn't even be half of their foreign reserves. So I don't know if we will ever see a sustained 7% yield on mortgage rates unless the "expected" inflation rate from investor is 5% or the emerging markets have better social safety nets which yield to more consumption versus 40% savings rates.