your thoughts on interest rates and government bailout programs

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financeguy_IHB

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This forum has been very informative and has pretty much convinced me to rent instead of buy a place. My only big concerns are interest rates and government bailouts. If I were to buy a place I would be financing 80% of the purchase price and getting a confirming loan. Right now 30-year interest rates are pretty low, below 6%.



My big concerns are:

1) With rising inflation and the depreciating dollar, I think interest rates will up in the future, maybe to around 8%. Like a much milder version of what happened in the late 70s and early 80s.

2) This would normally would cause home prices to come down even more as there would be less demand and more foreclosures because of the ARMs. However, congress keeps talking about bailing out the foreclosure situation. They could pass some programs, which through the FHA, would help the people in ARMs refinance, thereby avoid foreclosure. This would dampen some of the foreclosures, even with the higher interest rates. I don't have anything against the Democrats, but they are more likely to pass these bailout programs.



Honestly if I wasn't financing the majority of a home purchase, I think that it is definitely better to wait. However, given the concerns above, do you guys still think it's better to wait? Are my concerns unjustified or unrealistic?



Thanks for your advice in advance.
 
The federal government and the federal reserve have no choice but to increase the money supply. The federal reserve will lower the overnight rate, the discount window rate and the various action rates will decrease. The Treasury dept. will issue more debt. in order to continue the bail out, and the federal reserve will buy the debt and loan out the treasuries. Foreign CB's have decreased and some have stopped buying US treasuries, which will negate any effect the fed is having to lower interest rates. Competitive interest rates will rise. Real estate prices will continue to fall, and fall, and fall.



It will be wise to buy when prices are low and interest rates are high. If you finance, obtain a variable rate loan, wait years for interest rates to fall and refinance at a lower rate. JMO.
 
Whether they bail out current homeowners or not, it won't be affecting anyone who is able to get a loan right now. It might temporarily prevent people from getting loans, but it won't help or hurt anyone who buys before a bailout becomes law.



Interest rates are going up. 8% is a very optimistic guess, mine would be closer to 12% by 2011. That would support awgee's advice: wait to buy, then refinance when rates begin to drop again.
 
[quote author="Nude" date=1208167731]Whether they bail out current homeowners or not, it won't be affecting anyone who is able to get a loan right now. It might temporarily prevent people from getting loans, but it won't help or hurt anyone who buys before a bailout becomes law.



Interest rates are going up. 8% is a very optimistic guess, mine would be closer to 12% by 2011. That would support awgee's advice: wait to buy, then refinance when rates begin to drop again.</blockquote>


stupidest uneducated guess i've seen.
 
CMIYC - We generally try to comment on the merits of the substance of the post and try to avoid unnecessary personal attacks. To that end, what is your reasoning behind your opinion?
 
it would be interesting if someone here could run a chart for the last 30 years with three data groups. First, median (or mean) OC home price. Second, annual rate of inflation. Third, average annual (conforming and jumbo) mortgage rates for a 30 year fixed. It might provide a solid way to evaluate relative pricing and affordability over the years...maybe a fourth axis with OC average yearly household incomes... of course, I'm not a chart guy... and am at the mercy or generosity of others on this blog to create such a chart...



how many posts do I need to get into a condo... this rental is killing me.
 
[quote author="EvaLSeraphim" date=1208170436]CMIYC - We generally try to comment on the merits of the substance of the post and try to avoid unnecessary personal attacks. To that end, what is your reasoning behind your opinion?</blockquote>


Here is some <a href="http://www.irvinehousingblog.com/forums/viewthread/2007/#47450">context</a>, Eva.
 
GUII - I think you've not been paying close enough attention here... the real question should be (especially on this blog):



Why is the progression from homeless to Custom Estate? Shouldn't it be the other way around?
 
[quote author="financeguy" date=1208149712] However, given the concerns above, do you guys still think it's better to wait? </blockquote>


What harm is there in waiting? There is little or no chance of prices rising any time soon. Until the ARMs reset and all the Options ARMs go into foreclosure, there is going to be tremendous pressure on house prices. Even if the government were to somehow rescue everyone -- which isn't possible -- prices are still not affordable, so there will be no upward pressure on prices. Your concern sounds like a remnant of kool aid intoxication. You do not need to "buy now or be priced out forever."
 
[quote author="EvaLSeraphim" date=1208170436]CMIYC - We generally try to comment on the merits of the substance of the post and try to avoid unnecessary personal attacks. To that end, what is your reasoning behind your opinion?</blockquote>


Eva - Why would you assume there was any reasoning? Wasn't the post telling?
 
[quote author="IrvineRenter" date=1208234349]

What harm is there in waiting? There is little or no chance of prices rising any time soon.</blockquote>
I never meant to imply that housing prices were not going to decrease; they will. My point is that I think that interest rates are also going to increase because of inflation (like thishttp://biz.yahoo.com/ap/080414/inflation_squeeze.html).Therefore my concern would be that saving that I would be receiving from a lower price might be offset by the higher interest I would be paying.
 
[quote author="financeguy" date=1208246036][quote author="IrvineRenter" date=1208234349]

What harm is there in waiting? There is little or no chance of prices rising any time soon.</blockquote>
I never meant to imply that housing prices were not going to decrease; they will. My point is that I think that interest rates are also going to increase because of inflation (like thishttp://biz.yahoo.com/ap/080414/inflation_squeeze.html).Therefore my concern would be that saving that I would be receiving from a lower price might be offset by the higher interest I would be paying.</blockquote>


If you search around a bit financeguy, you will see the same concern ventured by me a couple of times. Mine even came with some hypothetical analysis... :)



The general consensus is that with the higher interest rates and lower prices, you'll be no worse off from a payment perspective each month, have saved on property tax base, and since you have borrowed less, will have the opportunity to refi once rates return to a more normal territory.



All that being well and good, if I found the house I wanted and could comfortably afford (28% DTI on household wages today, not assuming future wage growth) it on a 30-year fixed, I'd buy today vs. wait for further declines.
 
[quote author="catchmeifyoucan" date=1208169345][quote author="Nude" date=1208167731]Whether they bail out current homeowners or not, it won't be affecting anyone who is able to get a loan right now. It might temporarily prevent people from getting loans, but it won't help or hurt anyone who buys before a bailout becomes law.



Interest rates are going up. 8% is a very optimistic guess, mine would be closer to 12% by 2011. That would support awgee's advice: wait to buy, then refinance when rates begin to drop again.</blockquote>


stupidest uneducated guess i've seen.</blockquote>


Catch doesn't have much to offer in the way of intelligent analysis or thoughtful opinion so he just goes for inane and useless... Unless his family and his wife tell him it is so, he's not going to believe anything anyone suggests.



He'll be underwater on his Cortile mortgage soon enough. That'll hopefully mean he'll be too busy to post around here as he'll need a 2nd job to fund his real estate empire.
 
[quote author="financeguy" date=1208246036][quote author="IrvineRenter" date=1208234349]

What harm is there in waiting? There is little or no chance of prices rising any time soon.</blockquote>
I never meant to imply that housing prices were not going to decrease; they will. My point is that I think that interest rates are also going to increase because of inflation (like thishttp://biz.yahoo.com/ap/080414/inflation_squeeze.html).Therefore my concern would be that saving that I would be receiving from a lower price might be offset by the higher interest I would be paying.</blockquote>
Let's assume that the worst occurs... the average interest rate for a 30-yr fixed doubles in the next 3 years because no one is willing to invest in RMBS anymore and the bank have to hold hse loans on their books. Let's also assume that due to a complete collapse in home sales, a $600k home today goes for $400k 3 years from now. The difference is $600/month more if you end up paying 12% on $400k rather than 6% on $600k.

But between now and then, you'd be socking away more money for that down payment, and you have to figure that in your equations.

When was the last time mortgage interest rates doubled in the span of a few years... anyone know? CMIYC? No?

<img src="http://mortgage-x.com/images/graph/r_30_prime.gif" alt="" />



FG, interest rates have to go up, because banks can't make any money if they go down; they can't profit off holding the mortgages, and no one else will buy them, without some serious interest payments. That is the "new" reality. But buying a house just to lock in a low interest rate, well... interest rates always come back down too. The best play here is to wait, borrow the least amount possible, deal with the interest until rates drop again, then refinance. Over a few years, you will be paying less interest on less principal and have a mountain of equity in your home.
 
The graph doesn't depict well Nude... Eye-ballin', looks like 30-years hit 8% in 2006, but that was definitely not true. The trend/cycling is telling though...



Since '92, I think the average rate on a 30-year conforming is probably 7-7.25%. Today its at 5.625%. On a sustained basis, rates have nowhere to go but up up up.
 
Nude's graph is very telling. I disagree that banks will absolutely make more money with higher interest rates. Banks will be in trouble -- not making more money when interest rates go up. It depends on interest rate differentials.



If you look at super high interest era in the late 70s/early80s that was Fed Chairman Volker's attempt to stop inflation. That was when the US was exiting the Vietnam war and inflation was flying sky high.



If you believe that inflation rate is going to go up then that means that 30-yr mortgage rates will go up. That will also mean that there will be a lot banks getting into trouble. The loans they hold in the book will be repriced much much lower which means more write-offs and more capital raising needed to maintain adequate capital ratios.



Banks makes money on net interest margins - the differential of their borrowing costs and lending rates. Higher interest rates does not necessarily mean higher net interest margins. Net interest margins will be high only if the long-term rates are much higher than short-term rates. Bank essentially lend long and borrow short.
 
[quote author="ipoplaya" date=1208250819]The graph doesn't depict well Nude... Eye-ballin', looks like 30-years hit 8% in 2006, but that was definitely not true. The trend/cycling is telling though...



Since '92, I think the average rate on a 30-year conforming is probably 7-7.25%. Today its at 5.625%. On a sustained basis, rates have nowhere to go but up up up.</blockquote>
Not sure what you are looking at, Ipo... maybe '00? 2006 is clearly below 7%.
 
I don't know enough to have an opinion on this. But here is an interesting link - haven't seen that proposal before.



http://www.nytimes.com/2008/04/14/opinion/14leamer.html?ex=1365912000&en=980bec7a9a46dd0f&ei=5124&partner=permalink&exprod=permalink
 
Very interesting document here

http://www.cbo.gov/ftpdocs/90xx/doc9078/04-11-Housing_with_Letter.pdf



-If the objective is to assist homeowners in distress, some of the policies seem likely to succeed, at least to some degree. Many policies intended to help homeowners may produce significant benefits for lenders as well. Avoiding some unintended effects will be virtually impossible because it is difficult to distinguish among homeowners who were victims of their poor judgment or of predatory lenders, those who overstretched their finances for purchasing investment properties, and those who exploited poor underwriting standards.

- If the objective is to avoid foreclosures and abandonment of properties, intervention might break a downward spiral in which foreclosures put houses on the market, pushing down house prices and producing more foreclosures. Although many analysts believe that house prices remain too high relative to people?s incomes, such a spiral, without intervention, could reduce prices even below their long-run ratio to incomes and production costs.

-If the objective is to arrest the decline in house prices,however, the policies are less likely to succeed. Perhaps the most important short-term influence on house prices is the elevated number of unoccupied houses for sale (the inventory overhang). That overhang is likely

to remain until house prices fall enough to stimulate additional home sales. Put simply, none of the policies can (or presumably should) guarantee that house prices will stabilize in the near term. Furthermore, attempting to avoid (as opposed to attenuating) the market?s necessary adjustments may not only be unrealistic, but even if it were to succeed, might ultimately serve only to delay the recovery of financial markets and impair the pace of economic activity.
 
Rates may go down for a bit longer but the fed will eventually have to pay the piper. Just as in 1994 after lowering rates to combat the 1991-92 recession the fed bumped up rates over 3% in just 12 months. This drove OC into BK if you remember this. Rates are going up and sometime soon. The only sure thing about rates is that they go down and they go up.
 
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