4.5% Interest Rate's Affect on Home Values

When interest rates are up, home values go down.  When interest rates go down, home values go up.  That’s a basic principle, but I do agree with those who expect this market to perform counterintuitively to stablize prices vs. causing them to go up.  Basically that means they go up to where they are, counteracting the continued pressure for them to decrease. (see 5th paragraph below)

In 1990 when I started in real estate, the common walk-in client said “I want to buy a 4 bedroom, 2.5 bath colonial, with a basement and a monthly payment of $1,200”.  Let’s set the bogey at double that and toss out the basement 🙂  The number I hear most often for the neighborhood below is a rental payment of $2,500 a month or a mortgage payment of $3,000 or so with 20% down. (talking SFH Redmond here)

I like using Abbey Road in Redmond as the bogey house.  Kind of like Goldilocks and the Three Bears selection process.  Not too big, not below desirable…just right.  Good schools.  Popular neighborhood;  3 car garage most times. Current median price around $700,000.  Range of pricing from $630,000 to $830,000.  Not too new to be affordable, not too old to be acceptable.

Let’s test the theory with a monthly payment of $2,800 a month not including taxes and insurance which would add about $500 a month to the payment, and using 20% down (see next post for ratio of value to total mortgages of the neighborhood). Let me test that against $3,000 net after tax payment.  The after tax benefit should be about $700 minimum, so $2,800 plus $500 = PITI of $3,300 less $700 gives plenty of breathing room for price to go up to $750,000 or for people to stick at $650,000 if their household income is $100,000 vs, $150,000.  Depends on whether you use 28% or 33% for housing payment.  At 33% of $100,000 you would need about $200,000 down on the $650,000 purchase price.  Fits the basic buyer profile for that area anyway you slice it.

Rates of 6.25% and 20% down and a payment of $2,800 P & I,  would equal a sale price of $570,000.  Current prices would continue to be drawn down toward $570,000 at rates of 6.25% even in a seller’s market (which this neighborhood still is) due to financing qualification changes. Someone asked me from Sunday Night Stats why prices are continuing to go down in Seller’s Market neighborhoods.  That’s your answer.  Qualifying guidelines & interest rates reducing the ability to purchase and pressuring prices downward.

Now let’s change the rate from 6.25% to 4.5% and see what happens to sale price.  Keeping the same monthly at $2,800 and 20% down at 4.5% the sale price would be $690,000. 

So, my gut was right.  As rates go down to 4.5%, it does not increase the price from the $700,000 bogey we started with, but it does stablizes home prices and keeps them from slipping further down.  I always work through these things in my head in real time, testing my perception against reality.  I’m always happy when I prove myself right, and admittedly sometimes scratch the post if I prove myself wrong by the end of the post :).

I test the same theory on Rivertrail Townhomes with a bogey of $1,800 a month P & I.  High end I won’t calculate…and clearly not at 20% down.  I can’t realistically do townhome scenarios until FHA rates get lower.  But the $700,000 give or take single family home market will clearly be supported in value by interest rates of 4.5% preventing prices from slipping further back.

So to answer Jillayne’s question on my Sunday Night Stats post (sorry for the delay, Jillayne; had to test my answer) the 2nd wave of Alt-A’s will not affect pricing in this scenario IF 4.5% interest rates take hold, counter-acting the negative impact.

Sorry for the long drawn out answer to Jillayne’s question, but I don’t answer off the top of my head, even when I think I know the answer in two seconds.  I test my answer first…and this one tests out in this example.  FHA won’t test out, I’m not even going to try to test it out.  Unless FHA rates get much lower, the middle value market is going to win on all fronts.  High end will continue to suffer from Jumbo Loan issues.  Low end will continue to suffer from cash to close issues unless FHA rates come down substantially and toward at least 5% or less.  FHA and VA rates were conspicuously missing from Rhonda’s Friday rate post…  Maybe she can pop her head up from her busy day and catch us up on where those rates are, or at miniumum include them in this week’s Friday Rate Post.

Bottom line…4.5% interest rates will stop property values from declining…at least in my service area of North Seattle and Eastside.  Someone else will have to test the theory in the South End of Seattle and beyond, and for the rest of the Country.

184 thoughts on “4.5% Interest Rate's Affect on Home Values

  1. Hey Ardell, I’ll price out FHA rates for you right now–just give me a few minutes. 🙂 Friday we had some dramatic weather going on and I had to pull myself away from blogging…it wasn’t easy! (And everything turned out fine).

  2. Ardell – Do you have buyers waiting for the magic 4.5% rate to arrive before they will consider writing an offer? I am an Loan officer and have had a couple of prequal customers saying they were holding off doing anything until the 4.5% came to fruition. We’re were close to that this morning but most lenders repriced their loans for the worst this afternoon.

  3. Here is a current FHA rate quote based on 1:00 today (we’ve had 3 rate sheets w/increases BTW so far today):

    5.375% priced w/1 point (apr 6.052) for up to $362,790 (King County SFD limit).
    5.625% priced w/1 point (apr 6.300) for $362,791-$506,000

    45 day locks for rates quoted above with 620 low mid-credit score or better and max ltv of 96.5%.

    BTW I’ll post rates first at RCG this Friday and then do my afternoon post at Mortgage Porter to make up for last week.

  4. I think the bigger impact on the home values is going to be down payments required in many areas, not rates. Dropping rates is not gonig to do anytihng to help the housing market in many areas.

    I will use Chicago as an example. Here in Chicago, we aren’t considered high cost area so we are still going off the $417k loan amounts. We also have a lot of condos as you pretty much can’t find a single family in the city for under a $1 million even though statistically our median home price is about $274k (still not sure where this house is locate as I have seen crack houses selling for more, but the government makes the rules).

    The buyers of these homes are usually high income professionals who can usually afford the monthly payment, but because they are typically in their late 20’s and early 30s, most do not have the 20% down payments that are required for jumbo’s these days. This is creating a glut of high end condos because no one can come up with the massive down payments even though they can afford the payments. Can;t get a second mortgage to do an 80-10-10 and you can’t get PMI on jumbos.

    I have several buyers who make $200-$300k/year who are now looking at lower price points just because of down payment restrictions. Last year, these buyer would have bout places in the $550-$750k range and are now looking at places around $475k so they get a conforming loan and don’t require as hefty of a down payment.

  5. Sorry, I just don’t see how low rates can keep prices up. If the over-all pool of people who can qualify for mortgages decreases (with tightening lending critieria, larger down-payment requirements, etc), then prices will continue to fall regardless of the interest rate.

    There’s also the fact that higher unemployment rates, and lay-offs, can also shrink the pool of possible buyers.

    Don’t forget there is a huge mass of existing home owners who are destined to lose their homes to foreclosure in the next few years since they have 1) no equity and 2) negative amortization loans that will have massive payment resets. There are also changes in consumer psychology that kick in during deflation, where people simply become skittish about buying ANYTHING.

    All of these factors will contribute to keep driving real-estate prices lower.

    By the way, rental rates are falling these days. It is NO coincidence that rental rates are falling at the SAME time that mortgage rates are declining. They are all falling for the same reason: everyone is shunning “assets” and putting their money into government backed securities for safety. The lower interest rates go, the lower rents will go too, which impacts the calculations.

    As I’ve said before, Japanese mortgage rates have been extremely low for nearly 20 years yet that didn’t prevent (or reverse) the massive real-estate price decline.

  6. I agree with Sniglet- Lower rates won’t keep prices high. “If the over-all pool of people who can qualify for mortgages decreases (with tightening lending critieria, larger down-payment requirements, etc), then prices will continue to fall regardless of the interest rate.”

    The bottom line is that things won’t get better; houses won’t get sold until consumers have more confidence. People need to take a hard look at what they can afford as well as whether or not this is such a great time to sell. The market will come around eventually. In the meantime, stick with your current home if you can, and make improvements to it that will help to increase the resale value.

  7. Prices will drop more slowly with lower rates than they would have had rates remained the same. Slower price declines means fewer defaults which means fewer bank failures.

    Rates are low because the Fed is injecting money to increase liquidity and fight deflation. At some point the tides will turn and rates will have to be increased to suck that money back out to fight inflation. Rising rates will cause prices to drop, but those drops will be partially masked by the inflation rate. Real estate is a fantastic hedge against inflation and increased demand will also slow the losses due to rising rates.

    The real question is, “How long is it going to take to switch from a deflationary period to an inflationary period?” I don’t think anyone knows the answer to that. Japan has been stuck in their deflationary cycle for 10 years.

    My wife and I talked about buying a short sale last night. $350k is our stretch limit and we both decided it doesn’t make sense to commit to $2k expenses a month in this economy. Still, getting a loan locked in at 4.5% for 30 years with the expectation that rates will be in the double digits for part of that loan period is awfully tempting.

  8. Thanks for chiming in from Chicagoland, Russ. I can’t engage, but will give a shout out to Geno Petro and see if he can shed some light on your home price question in Chicago.

  9. Alan wrote: “Rates are low because the Fed is injecting money to increase liquidity and fight deflation.”

    Nope. Rates are low because there is tremendous demand for government backed securities (treasuries, GSE bonds instruments, etc). Fed liquidity injections are merely a coincidence. The Fed is attempting to stop this deflationary train, but are doing a very poor job of it so far. In fact, the low mortgage rates are an indication of just how unsuccessful the policy markers attempts at stoking inflation are.

  10. Cathy,

    Not really. I’m having the same last quarter issues as to my buyer clients that I always have in the last quarter. People want to buy, but even with all the inventory, it’s hard to find the right house at the right price. New listings usually pop in after the first of the year, and they are often more desirable. That scenario continues through June or July most every year.

    There are some good homes, but not necessarily for my particular clients’ needs. Rates have dipped under 5% on this day or that, so I can’t say waiting around for better rates is the issue in the last week or so. Storm coming and below freezing temparatures will have more impact than rates in the next few days.

  11. Comment #8 using business name vs. name I can respond to :),

    I have many contacts in the home remodeling business, and their business has dropped to beyond negative. Seems people would rather buy a different house than throw their good and hard earned money into their current home, for fear they will never get that money back out again.

  12. My position is sort of mixed. I don’t think lower rates directly raise prices. They will, however, allow someone into a house that is otherwise out of their range, which increases the market for any given house, and thus slightly increasing it’s value. It can also help the buyer who has fallen in love with a house just beyond their comfort range.

    But I don’t think that anyone should pay more for a house just because rates are lower. That would be like someone paying more for a house just because the seller is paying points. For that to make financial sense the buyer would have to own a long time, with the same loan.

    Oh, and people do seem to be more in touch with rates, as opposed to say the $7,500 first time home buyer tax credit. So lower rates would probably do more to stabilize prices than that tax program.

  13. “Still, getting a loan locked in at 4.5% for 30 years with the expectation that rates will be in the double digits for part of that loan period is awfully tempting.”

    Clearly you are among many, and that will impact 2009 significantly for the better in some way or another. Still “stretching in to $350,000” is too much of a gamble…it is clearly not a good time for stretching from a job security standpoint. It’s a good time to buy with one income with the second income as a backup. If your wife does not work, but could if things got tight later…then maybe yes.

  14. Sniglet,

    Excuse me for saying so, but given your predictions of real estate going to twenty cents on the dollar, I think you have a vested interest in failure. I do not say this to criticize as I do enjoy your podcasts. But I consider you to have more of a bias for things to get worse, than I have for things to get better, even though I work in the industry. You supposedly have no vested interest in the outcome, besides maybe being embarassed at some point. But you do seem to want prices to get to twenty cents on the dollar more than you want things to get to at least stable. Am I wrong on that?

  15. LOL Kary,

    It’s OK for you to say: ” I don’t think lower rates directly raise prices.” here on RCG. Just remember when you take your continuing ed classes that the correct answer in the test is “lower rates equals higher prices; higher rates equals lower prices”. Given it’s part of an agent’s continuing ed to learn that, seems odd for you to contradict it.

  16. “So lower rates would probably do more to stabilize prices than that tax program.”

    No question…30 years of lower payments trumps a one time interest free loan any time.

  17. Ardell…Russ pretty much nailed the Chicago SFH scenario. Not sure if there was an actual question but it certainly is an accurate observation. Even 30% down on a Super Jumbo is often required here.

  18. Ardell, I think you’re looking at it too simplistically.

    Let’s take a fairly extreme move from 6% to 4.5%. At 6% $2,400 of payments would allow you to take approximately a $400,000 loan. At 4.5% it would be almost $75,000 more.

    Should a buyer pay $75,000 more for a piece of property because of a reduced interest rate? No. To come out the same as someone who bought for $75,000 less at 6% they’d have to hold the loan almost 30 years.

    If both had to sell in 2 years, the 6% buyer would be better off. If the 6% buyer could refinance at 4.5%, that buyer would have the best of both worlds because they could have the lower interest rate on the lower price.

    Lower interest rates will get more people out, and get more people to look at houses in certain price ranges. Basically it’s an increase in demand, but it shouldn’t be a simple mathematical calculation. That’s what I meant by indirect. Any buyer making that calculation will be more likely to come out on the short end.

  19. Sooner or later, the rates will go back up. If you buy now and pay more because of ther low rates, you will be “underwater” when the rates go back up (which they will). I believe this is in great part what kick-started the recent bubble – artificially low rates. This is just giving herion to the addict because we cannot handle the withdrawal symptoms.

  20. Ardell wrote: “No question…30 years of lower payments trumps a one time interest free loan any time.”

    Agreed. If you did a blended rate calculation on the $7,500 tax credit, similar to how a blended rate was calculated on an 80/20 loan, the effect would be minimal. But my point was simply people seem to find out about lower rates, and no one seems to know about the first time home buyer tax credit. Things few people know about don’t tend to increase demand.

  21. I’ve said this before, but I’ll say it again. I think the lower rates are the Fed’s indirect way of dealing with the failure of the TARP program. Look at Sampai–he just bought and is already thinking of refinancing.

    Part of the problem with the mortgage backed securities is no one knows what percentage are bad. Low rates result in refinancing activity, which basically removes the good loans from the pool. With low enough rates anything remaining in the pool could be assumed to be bad (absent maybe a prepayment penalty that would make refinancing not worthwhile).

  22. Kary,

    I was pulling your leg, but seriously, if you ever see that question on your Continuing Ed Course Test (and I have) that is the correct answer…as far as passing that test is concerned.

  23. Thanks for stopping by, Geno. This just makes no mathematical sense to me:

    “you pretty much can’t find a single family in the city for under a $1 million even though statistically our median home price is about $274k”

    How can a median be $274 if you find find a house under a million dollars?

  24. Patent Guy,

    Yeah, well hopefully after the unemployment rate recovers. That’s after it gets worse before it gets better. Too many bad things in the mix can ruin a Country.

    All the Japan guys…this ain’t Japan. I think the strings that are being pulled will keep us better than Japan, as we will always be.

  25. Chicagoland is a huge geographic territory and the city proper has over 200 neighborhoods. The dozen or so I work in (probably the same for Russ) are fairly pricey and surround and encompass the downtown area The other 90% or so are further out but still within the city limits (10+ miles from downtown in every directioj but east) and clearly spike the numbers downward.

  26. Right now, the low rates may impact refi’s more than purchases…however, I think this is the beginning of the lower rates based on the Fed’s press release yesterday. When they really start buying MBS–rates will continue to go down.

    If the “right house” is available now at $500,000 with 20% down, at 4.5% the p&i is $2026.74.

    To have the same payment at 6%, the loan amount needs to $338,000 (almost $62k less than $400k).

  27. So historically, when there has been high inflation=high rates have prices dropped, and when there has been low rates=low inflation, have prices increased quickly?

    I seem to remember a conversation a couple weeks ago when we found high rates corresponded with increasing prices, because they happen in times of high inflation, and the opposite was true as well.

  28. Giving the rate as much consideration as the price, considering only the monthly payment, only makes sense if you will keep the same loan for the entire 30 years. Otherwise you will get all of the disadvantage of paying a higher price and only part of the advantage of a low rate.

    Your equity if you sell before the loan is paid off depends on the price, not the interest rate on the loan.

  29. CB that’s an excellent point that I didn’t think of. Not that I consider buying at today’s prices at any interest rate, it just makes me even more sure about it.

  30. Cautious Buyer,

    If the low rates are successful at keep prices stable, and we should know that within 90 to 120 days, then it won’t be a matter of paying a higher price based on payment alone.

    Many people are “payment buyers” for sure…most even.

  31. Lower rates won’t make much of a difference.

    If we go back to low rates we’re still left with the tighter underwriting guidelines.

    No more stated income, no more no-income-verif, no more 100% LTV loans for people with poor credit. No more 100% owner occupied loans for investors who lie about occupancy, no more sky high debt-to-income ratio loans.

  32. CautiousBuyer, as to #30, interest rates do tend to trend with inflation. Banks are unlikely to loan at 4.5% if inflation is 6%. But prices are only affected, not determined, by interest rates. Back in the late 70s, early 80s, interest rates were high, but Seattle real estate was flat or slightly up, while other parts of the country did suffer. It’s only one part of the equation. Thus, it’s similar to falling gas prices which should help real estate prices, but don’t expect real estate prices to rise because gas prices are falling.

    As to #31, that’s exactly what I was saying. Buyers still need to pay attention to price, not just monthly payments. Again I’ll use an automobile example, where a lease might result in a low monthly payment, but be a bad financial move, especially if the lease is based on a higher price.

  33. Ardell,

    I believe you when you say most people are payment buyers. Exactly why we are in this mess. Most Americans just want it now, does not matter if they can afford it; just give us more credit, NOW. Chrysler says “we have plenty of “buyers” – but only if someone gives them credit”. Really – no kidding??? Lower rates? Fantastic – now we can “buy” more and nicer stuff, since it’s all just payments.

    California is on its way to one of the all time government CF’s and about to crash and burn before our eyes, UNLESS (of course) they get a $50B (ummm, better make that $100B, no wait … $200B) bailout. I’m sure there will be 20 (30?, 40?) other states in line right behind (maybe in front?) of us. Then come the cities.

    We have spent ourselves out, and do not know any other solution except more bailouts, free credit, lower rates, higher limits, and continued unsustainable spending.

    There. I feel better!

  34. Ardell wrote: “you do seem to want prices to get to twenty cents on the dollar more than you want things to get to at least stable. Am I wrong on that?”

    I want home prices to come back in line with historical income ratios, and for the economy to get back on a firm foundation of savings and thrift. Unfortunately, this means that prices will have to fall a lot more.

    “Stabilizing” prices at current levels will just perpetuate the economic imbalances and cause us to face deeper consequences later down the road. Just look at the result of avoiding a recession in 2002 by flooding the financial system with liquidity? Sometimes the best course is to accept the pain.

  35. IMHO, if you can’t afford to buy at 6%, you can’t afford to buy at 4.5%. Low rates have never been the problem with the housing market. Prices are going to have to come down in many areas and they are going to come down hard just because of tighter underwriting requirements and nothing more.

    The prices we have today are the result of low down payment requirements and even lower credit standards. We also have an oversupply of homes due to unchecked development and artificial demand created by speculators – see the high rise condo ghettos and tract homes in Vegas, Miami, & Phoenix.

    Until we work through all this extra inventory I don’t know what else can be done. In fact when you look at the stats, the rest of the country is pretty much paying for the excesses of basically four markets – NV, CA, FL, and AZ. If we could some how just rope off those four states, we would probably be alright.

    I am glad I love my little bungalow and didn’t stretch to buy it because it looks like I am going to be in it awhile.

  36. Russ,

    What do you think will happen to all of those million dollar homes you were talking about. Sniglet thinks I can come and buy them for $200,000…I don’t think that’s ever going to happen.

  37. Kary,

    That’s why it is important for people to decide what payment they can afford and what type of loan they want before they go out looking at property. Too many go out looking and then say “how can I get this” after they fall in love with it.

    Popping people’s prices is often done in real estate, which is why I say the agent has to be involved in the loan qualifying process.

  38. Ardell wrote: “We won’t see savings until we see interest rates rise quite a bit, but now is not the time.”

    Unfortunately, I just don’t think we will see a bottom to this downturn UNTIL savings have increased substantially. The only thing government stimulus, or central bank, actions will accomplish is to prolong the downturn and delay the clearing of debt (i.e. through defaults, etc) and the re-establishment of savings. It would be FAR better to just allow the system to experience a massive crash over one or two months (i.e. with Dow and home prices dropping 80%), and then allow the recovery to begin. The way things are going this bottoming process will be strung out for several years.

  39. Ardell, you may know much better than I do, but I suspect folks that can actually afford a new car (assuming they want to buy one), can get a loan to do so. The problem is that too many car buyers were the auto-equivalent of subprime, if you will.

    You say (regarding houses) “Too many go out looking and then say “how can I get this

  40. There’s also the human behavior side that we’re not factoring in.

    Right now potential homebuyers are concerned about falling home prices and their own financial stability in these recessionary times. I’m not so sure low rates would get a large percentage off the fence.

    Low rates WOULD help refinancing homeowners.

  41. Ardell and Sniglet:

    Prices to not need to fall 80% or 20 cents on the dollar to get in line with historic income to home price ratios, unless you are predicting massive HH income loss too.

    National historic ratios were about 3 times HH income, and local market variations were from 2.5 to 4, before the “Era of Easy Money” began.

    King County median annual HH income is around $80K, and Seattle tended to be in the 3.5x range during the 90s. That would make the “natural” median house price $280K, compared to what…$380K now?

    That doesn’t look pretty (for current owners, at least), but it’s not 20 cents on the dollar either.

    I just had to laugh this AM, when I read the blurb from Paulsen saying they did not promise 4.5% rates, at almost the same instant rates hit 4.5%…priceless!

  42. Jillayne,

    Rates have been at 4.5% and lower as recently as this morning. How can they deny this will happen when it has already happened? I originally used 4.375% as I saw Rhonda quote that rate recently.

  43. Just saw Roger’s 48.

    Roger, do you know if a home with no kitchen cabinets or bath fixtures can be financed with 40% down. The question came up today on my Short Sale post.

  44. As Usual, Calculated Risk Said it best, back in October:


    “First, it is important for a healthy housing market to allow prices to return to more fundamental levels (and that means further price declines and/or increases in household incomes).

    Second, this shows a misunderstanding of the role of interest rates with regards to house prices. This gets complicated, but if the interest rate is artificially low today, the buyer can expect rates to rise – and therefore that the home price will not be as high in the future (all else being equal). The buyer should discount this lower house price back to the present, and we discover that interest rate changes only play small role in house prices.”

  45. I tend to agree with him, and by extension, disagree with you, Ardell, when you say this will put a floor on housing prices.

    You have a record of denial, then of vigorously co-opting what you had previously denied. I think your predictions will play out the same here in 2009.

  46. Ardell;

    The million dollar homes are going to see some price declines, but I don’t think they are going to fall that far, at least not here in Chicago. Prices are going to fall to where people can reasonably qualify for financing which means not only having a monthly payment you can afford but also the down payment. In Chicagoland, the affordability isn’t the problem. It is down payments now. Most people do not have $100’s of thousands of dollars laying around for large down payments for a non liquid asset like a home. In fact, it would be down right foolish to give up your liquid cash to buy a home in these uncertain times. I know I wouldn’t. I would rather have all my money in the bank and a 100% LTV in case I lose my job than a 50% LTV and no cash to pay my bills if I lost my job. Who do you think is going to foreclose first?

    Like I said earlier up on the thread, I lost count of my clients who can EASILY afford payments on a $750k-$1 million dollar home and have put off buying so they can ensure they have a larger down payment needed to qualify and in many cases have just altered their price point significantly lower so the down payment isn’t so burdensome.

    Even if you are making $200-$300k per year, it still takes quite a bit of time to save up a couple of hundred grand in cash on top of full contributions to 401ks, keeping some cash around for emergencies, and living some what of a reasonable adult life style not requiring 3 college roommates. Not to mention most of these folks have some pretty hefty student loans from grad school.

  47. Re PatientGuy #37 and Russ #39, I’d only agree with what you say for the people that take things to the limit. There’s nothing wrong with getting a car or a house with a loan. In fact, it would be impossible for most people to every buy a house with cash, even if prices dropped significantly.

    Using the car example though, if the only way you can afford a $40,000+ car is a lease, you probably shouldn’t be driving a $40,000 car. It’s at the extremes where there are problems.

  48. Patientguy wrote: “Ardell, you may know much better than I do, but I suspect folks that can actually afford a new car (assuming they want to buy one), can get a loan to do so. The problem is that too many car buyers were the auto-equivalent of subprime, if you will.”

    Nothing against Ardell, but I doubt she knows that because like the rest of us she’s probably relying on the press. The press has misreported the availability of housing loans, so I really don’t trust their reporting of car loans where for example they were reporting it affecting sales about 25%.

    The thing is though, that car loans don’t have Freddie and Fannnie, etc., and thus would likely be subject to the same credit crunch as the rest of us. And I’m fairly sure GMAC is no longer owned by GM, but not sure about FMCC and CMCC (or whatever the Chrysler one is called). The point is, these entities were set up to help finance cars and thus sell cars, but to the extent they’ve been sold off, they no longer provide that function.

    To the extent that lenders are not making car loans, that’s another area where the bankruptcy act needs amending. The car lenders were given very favorable treatment with the bankruptcy act amendments, and if they are not lending, causing industry to collapse, I’d say take that protection away. It shouldn’t have been given to them in the first place.

  49. The thing about $1,000,000+ homes is that the people buying them have lost a lot of wealth in the past year. That has to affect their personal confidence, if not their abilities. So those houses are affected more by the stock market than the credit market.

  50. Kary:

    I am not talking about people taking things to the limit. Most of my clients who can’t buy in that upper price range now are not borderline buyers in terms of income, credit, and even assets to some degree. These are people with near 800 FICOs, $200-$300k salaries in fairly solid professions, very little credit card debts, and usually have debt ratios around 25%. EVERYTHING is perfect on the files except they are not going to come up with the cash required to buy these places anytime soon.

    Prime example, ING requires a 40% down payment on condos in Chicago if you want a loan up to $850k. Forty freaking percent! So if you want to buy a million dollar place, you need $400k in CASH. Another good jumbo lender with good rates requires 30% down.

    The point is prices have to come down irregardless of rates because the market of buyers with that kind of cash laying around to sink into a home is not that large relative to the amount of properties on the market now in that price range.

  51. Kary,

    I think the only thing I ventured to say about car loans is that I don’t see a day when all people buy them as cash transactions. I know very little about cars and the car business, period. 🙂 I do know I’m not going to be driving one in this snow today.

  52. Russ, but would those buyers have been able to come up with 40% down a year ago, before their stock holdings took a 40% loss? I’m big on pointing out that higher priced properties typically sell with higher percentage down payments. But when someone takes a 40% haircut on their liquid assets, it’s harder for them to come up with a large down payment. That’s why I said that market is more affected by the stock market than the credit market.

  53. Ardell wrote: “I do know I’m not going to be driving one in this snow today.”

    I suspect there will be more babies born nine months from now than houses closed 45 days from now. 😀

    Fairwood got hit with a particularly slippery type of snow the first batch. Just two days ago, well after the snowfall, they had to close down 140th near 169 because of the conditions. I’m not sure what makes some snow worse, but I’m hoping the current batch is not as bad.

  54. biliruben,

    In this post I am separating a market segment as to price and geography that I expect to perform well and in which housing prices will be supported by lower interest rates. It’s a market segment I deem to have had substantial downpayment all along, and not one that relied heavily on zero down loans.

    I have tested the affect of rates, and am satisfied with my result. I now have to test my perception of health of that area. I’ll do that in a post this morning.

    If I pull a completely different market segment…I will absolutely “contradict myself”. There is always less truth in saying the same thing all the time regardless of the facts at hand.

    I do not like to do any area that I do not work in day in and day out, because even though I am using statistics, I am balancing those statistics with personal experience involving typical home buyers in a given area and the houses themselves. I have lots of filters, even though I’m posting the result based on one factor.

    As I said in the post, the first time buyer without significant downpayment and the high end buyer reliant on Jumbo loans, are not addressed in this post. When and if I write a post on those market segments…it may appear that I am contradicting myself to people who want there to be one answer for all situations and markets. Reality is there is rarely one answer that applies to all people and neighborhoods.

  55. Re Ardell’s question

    “Roger, do you know if a home with no kitchen cabinets or bath fixtures can be financed with 40% down. The question came up today on my Short Sale post.”

    There’s almost never a simple answer (unless it’s no! :)). This answer will omit details, but broadly cover it.

    The general rule is that a home must be in sellable and livable condition to receive normal financing. No bath fixtures make it unlivable (I am assuming 0 bath fixtures in the home, with given info).

    There are solutions, but the borrower may not be thrilled with the terms.

    1. FHA has a nifty little program that allows the buyer to finance an additional $30K for home improvements like these, kind of like a mini-streamline construction rehab loan. It is a fairly simple loan to execute, more details available here


    But FHA loans are more expensive, and require mortgage insurance (for 30yr fixed) regardless of the down payment (even under 80% LTV). If it is a large loan (over the standard FHA limit), there’s qualifying problems too.

    2. There used to be a few lenders offering rehab loans in conventional, but I do not know at the moment if they are still available, I can research further.

    SO many loan programs are gone…I’d say at a guess more than half of the program types we had available 2 years ago are gone, and probably the percentage of lenders, originators (and for that matter, borrowers) are gone too.

    3. There are construction loans, but it seems like overkill for the scenario. Construction loans have higher costs, more labor, higher rates.

    There may be a lender willing to do a simple escrow holdback. In that scenario, the borrower obtains a 3rd party bid/estimate (no DIY), the money is held in escrow until completion, and the loan is closed out.

    Most lenders are very wary of that scenario, because it requires them to hold onto the loan (until completion), instead of moving it off the books by selling it on the secondary market, and entails a high level of risk to the lender, should the mortgage market change.

    The most likely lender in that scenario is a lender that WANTS to hold the loan long term as opposed to reselling it. Small, local banks and CU’s often will hold low risk loans in their portfolio.

    Sorry, couldn’t resist the long answer.

  56. Thank you, Roger. That was my perception. The scenario involves 7 offers or so on a short sale, all but one being cash. I was thinking from the buyer’s perspective that the cash offers should not have to beat the non-cash offer, if the house is not likely financeable.

    My response was it would be all about the buyer and not the house. If the buyer was a long time client of a local bank who would portfolio the loan for that particular buyer, then maybe yes. It would be more about the strength of the buyer and his relationship to the lender, than the house itself.

    Thank you for responding. I will cut and paste your response into the thread where the question was being asked. Thanks for taking the time.

  57. Can the housing market be strengthened by lower rate refinances beyond affordability of payment?

    I’m doing the stats for my next post regarding evaluating the long term health of the neighborhood into which you are buying. I noticed people who recently refinanced, doing so at lower debt ratios to move the new loan into conforming status.

    I’m seeing people with mortgages of greater than $417,000 refinancing at only $417,000 exactly in 2008, coming up with the difference in cash as additional downpayment. More in my next post, but I thought that was an important observation to report here regarding the affect of lower rates on market stability.

  58. Our household income is about 140K and there is no way in hell we’d tolerate a 3g mortgage payment. I think you are assuming people are still interested in being house poor when they aren’t seeing double digit YOY appreciation.

  59. I think the declines will simply occur more slowly as we see fewer distressed sales due to refis. This will simply prolong the misery for re pros.

  60. Don’t a lot of the down payments typically come from the sale of a lower priced home with equity due to appreciation, so they would be affected by the market for lower priced homes elsewhere?

  61. On the subject of car loans, I notice that many dealerships have neon paint all over the window advertising easy credit. Many dealership commercials also center on the availability of credit to people with “no credit, bad credit, come on in!”. They often advertise the monthly rate rather than price. Also, they tend to be staffed with salespeople who specialize in getting people to “fall in love” with a car, then make impulse buys based on the payment alone.

    Everything about most dealerships indicates to me that they depend on people with bad credit making bad credit decisions. A tightening of auto loan terms has to be disastrous to them.

    Not to mention that a new car purchase is something that you can usually easily put off (or buy used) if you are worried about money due to a bad economy.

  62. CB, re 67, we’ve been seeing the effects of not being able to pull equity out of lower priced properties for over a year now. The lower income level people tended to believe the press reports that financing wasn’t available. Higher income people, who have never had trouble, knew they could get credit and didn’t believe the press.

    But in the upper price levels being able to pull the equity out is often less of a concern. Their concern is more a slow sale on the old house–they often have the option of doing the transaction, but simply don’t due to the market.

  63. CB, re 68, all that is probably true. A big reason for the signs out front is probably to fight the press. I’m not sure if it still happens, but it used to be that auto dealers would assign some loans on a recourse basis, so if the buyer defaulted the dealership would be on the hook still. So a downturn in the economy could hurt them even as to sales made a year ago.

    If you like to negotiate, this probably is a good time to buy a car, probably especially a GM or Chrysler if you’re willing to take that risk. Me I think I’ll wait because my truck is only 20 years old next month and everyone is telling me it will only get cheaper in the future. 😀

  64. FYI, in the area I have targeted there are zero distressed sales. That is why it is important that we not apply general considerations to areas that are not impacted by those considerations.

    I’m doing the stats now as to current value, historical appreciation, whether current buyers put down less than those who bought in 2004 and before, and whether people who bought at 50% of current value have since cash out refied themselves into troubled waters. Will report via a separate post when I’m finished.

    I’m using Abbey Road again, as there are 272 homes. Doing a neighborhood of 25 houses would not be as useful. I plan to do 3 neighborhoods, all of which are in Bellevue in varying price levels downward.

    I don’t think doing over $1M properties will be of value due to Jumbo loan considerations. It is also near impossible to find a samle neighborhood of enough $1M + homes with significant turnover and similarity of properties, to be of any value.

  65. Ardell wrote: “FYI, in the area I have targeted there are zero distressed sales. That is why it is important that we not apply general considerations to areas that are not impacted by those considerations.”

    Good point. Many people think not only that all buyers are similarly situated to themselves, but also that all neighborhoods are alike. Neither buyers or real estate is fungible.

  66. So far my results suggest that in 2008 there was a modest price decline from 1.2 times 2008 assessed value, to 1.17 times assessed value when the stock market crashed, but that deline has already bounced back to the 1.2 to 1.25 level. Looks like a little fear pocket that has been eradicated.

    This based on 2008 sales which represent a turnover rate of just over 5% of the neighborhood, which given volume levels generally is pretty high. No distressed properties. No abnormally low price activity.

    Appreciation looks like:

    1992 to 1997 = 20% appreciation
    1997 to 2002 = 38% appreciation
    2002 to 2008 = 43% appreciation

    1992 price $300,000 + 20% = 1997 price $360,000 + 38% = 2002 price $496,800 + 43% = 2008 price of $710,424

    2008 cash purchase = 1
    zero down purchase = none
    Average LTV 70%
    Jumbo Loans – 1
    Conforming Jumbo – 60%

  67. Comment #66,

    28% of gross income has long been considered conservative for a housing payment without the expectation of double digit appreciation. Clearly not in the neighborhood of “house poor” at that ratio. $3,000 at $140,000 of income is 25% of gross. Most families would not consider that out of line.

    However, if you are truly happy with a house for less…great.

  68. “When interest rates are up, home values go down. When interest rates go down, home values go up. That’s a basic principle

  69. I agree Michael, that for rates to influence volume or price, they must compel someone to act differently than they otherwise would. One has to believe that rates and pricing affect how people act, and most believe that.

    As agents we know that a house is never inherently good or bad without knowing the price. You can walk into a house and hate it if the price is $600,000, but at $300,000 you are running to the phone to call a client.

    Same for buyers who walk out the door when the payment will be $3,000 a month ($487,236.66 @ 6.25%) but walk back in when the rate drops to 4.5% decreasing the payment to $2,468.76. To drop the payment to the same amount via price vs. rate, the price would have to drop by $87,000 for that $2,500 payment buyer to consider it. That’s an 18% price reduction or a change in interest rate from 6.25% to 4.5%…same difference to most buyers. That is most buyers buying homes to live in them; not investors.

    If the goal is to help prevent the 18% drop, decreasing the rate to that amount is not a guarantee of result…but it’s the correct way to try to achieve that result. It’s a valid effort regardless of outcome.

  70. Ardell wrote: “It’s a valid effort regardless of outcome.” No doubt and I sincerely hope the low rates will continue and will help stabilize markets where rampant speculation, greed and recklessness where not so pronounced as in the Seattle area. Many areas like in the auto land could for sure need such a stabilization.

  71. The benefit of the Seattle Market is many fold. Most significant is our run up did not begin as early as many parts of the Country and our “bad market” did not begin until others were already 2 years in and getting worse. Consequently the national fixes for those areas coming at this time, will keep our bad market at shorter than most others. Boston is a City I can see having the same benefit. What helps the worst of markets…also helps the best of markets.

  72. While we didn’t have the speculation that resulted in rapidly increasing prices, except perhaps a few months in 07, I’m not so sure the same is true of the supply side of things. Builders did go a bit crazy, especially in the outlying areas, but also within Seattle in the condo arena.

  73. “While we didn’t have the speculation that resulted in rapidly increasing prices”

    Yes, we did. We just didn’t have it from 98 on, as some other markets did. Some CA markets doubled from 98 through 02. We didn’t start with major upswing until early 2004. But we clearly DID “have the speculation that resulted in rapidly increasing prices” from early 2005 through the meltdown.

  74. I guess it depends on the definition of speculation. Not really disagreeing with either Ardell or Kary.

    I’d love to see the data comparison on true owner occupied transactions broken down by MSA during the national run up in prices.

    There was clearly a huge problem in Nevada and Miami of investor buyers (whether there was additionally fraud regarding occupancy is another matter), as is being revealed in the foreclosures and drastically reduced values.

    I did not observe a high incidence of investor purchasing locally in the Seattle MSA during the rapid run up in prices.

    I would say that investor/flippers are truly speculating, whereas the person who just wants to own a home, and finds suddenly that lenders are willing to let them at terms unavailable previously (zero down, stated income, etc.), are not necessarily speculators.

    Does anybody have stats that would show the percentage of NOO transactions by area?


  75. Roger,

    Seems to me I read somewhere, that many were buying as owner occupied but were flippers and investors, and alarms did not trigger until they bought 5-7 that way.

    If they changed the tax billing address after purchase, I may be able to calclate the % you are looking for from the County records.

  76. Roger,

    Yes, it appears I can track that by year and zip code

    98103 recorded in

    2002 owner occupied 452 – not owner occupied 133

    2003 owner occupied 560- not owner occupied 200

    2004 owner occupied 672 – not owner occupied 178

    2005 owner occupied 771 – not owner occupied 198

    2006 owner occupied 787 – not owner occupied 241

    2007 owner occupied 847 not owner occupied 281

    2008 YTD owner occupied 561 not owner occupied 160

    Interesting. Thanks for asking.

  77. Ardell:

    Thanks for that data.

    I’m not sure if 98103 is typical zip code in our area (it is the area north of Lake Union in Seattle, pretty dense, but with a mix of SFRs and condos, and a fairly high number of rental units, due to it’s proximity to the Uof W), and we don’t have another data set to compare it against, such as a national averages, or zip codes in FL, NV or CA (where foreclosure activity is the highest, and potentially, investor speculation), but the data here does not suggest, on a percentage basis, a significant change or trend in the Non Owner Occupied as a percent of the total over the years presented:

    Year OO NOO Total %OO %NOO
    2002 452 133 585 77% 23%
    2003 560 200 760 74% 26%
    2004 672 178 850 79% 21%
    2005 771 198 969 80% 20%
    2006 787 241 1028 77% 23%
    2007 847 281 1128 75% 25%
    2008 561 160 721 78% 22%

    Cool, it worked. I’d never tried to paste an Excel table in here before. Not as elegant as I had hoped, but it will have to do.

    What is evident from the data is a steady increase in the total number of transactions, up to 2008. That’s not really news.

    I guess that the hypothesis I am working from is that the Seattle area did not have AS great a run up in prices, did not have as great a percentage of a speculator/investor’s market, and did not have as great an incidence of fraud, and therefore, has not had as bad a fall in home values as the worst hit areas of the country, and will not necessarily follow the same pattern, on a delayed basis, as has been frequently postulated.

    Keep in mind, I am not suggesting that Seattle is “special”, or immune from falling prices (clearly, we are not), but that every area of the USA is special, and unique, and that the greater than average price collapses experienced in some areas have some unique causes (as well as some common ones).

    Food for thought…thanks for digging up the data. You must be a true geek, and I say that with all due respect 🙂

  78. I’ll have to look up the official meaning of the word geek…not now though. I’m number crunched out for the day. One game of Tetris and then to bed. Do geeks play Tetris before bed?

  79. I would not wait for a 4.5% rate…rates dipped down so quickly on Wednesday and in a matter of a few hours, the rate was back to 5.00%.

    This is from Lou Barnes recent newsletter:

    Excepting a frantic hour at no-fee 4.75% on Wednesday morning, mortgage rates remain as they have been for ten days, roughly 5.00% with an inescapable origination fee. And that deal is available only for the best FICOs and loan-to-values.
    These rates are not going lower any time soon, not on a sustained basis, not without extraordinary intervention…

    The average client simply does not believe the paragraphs above. If I were not a lifer in the mortgage trade, I wouldn’t believe them, either.

    In the last month, irresponsible media reports, wishful expectation by housing industry survivors, and trial balloons by non-market theorists have made FOUR-AND-A-HALF a national imaginary fact.

    Why are rates stuck? The main roadblock is the $10 trillion in outstanding first mortgages, rates scattered from mid-sixes to 5.25%. Toss out the ones that can’t refi (Jumbos, underwater vs. appraisal, clogged by piggy-back 2nd, stated-income or no-doc underwriting…), and the ARMs that no longer need to hurry — $6 trillion, anyway. The first trillion, above 6.00%, everybody who bought from 04 to 08, is in the money right now, eligible to refi with quick recapture of costs. That volume is equivalent to the total production capacity of the mortgage industry in 2008, severely diminished since the September financial cardiac arrest….

    The Fed is acting in an emergency. It will not last forever. When it ends, rates will rise, explosively from time to time.

    The zero-cost money is overnight money, and its a bad idea to finance a 30-year loan with overnight money. Long-term Treasury rates are also approaching zero, the spread versus mortgages unbelievable. The Treasury market is the most liquid in the world; when the economy bottoms, todays Treasury investors-for-safety will be able to dump at little loss. Even top-quality MBS are not very liquid… buyers at this level and below will get killed in the turn, and cannot hedge that risk in a Treasury market priced for GDII…”

  80. I think it’s much to early to say how much we will fall here compared to other areas. We surely have the potential for a big fall in dollars due to our high prices. Also of all the people I know that bought between 2004 and 2008 noone used a traditional mortgage. There are still many, many in this area that pay teaser rates or interest only. There are so many factors that can drive this market down very deep and few to counter act it. ( Hiring freezes and layoffs instead of massive expansion ). It’s just to early and in planning it would not be a bad thing to expect a San Diego style of depreciation even if it turns out to be overly pessimistic. Better to err on the cautious side as I think Ardell says from time to time.

  81. “Better to err on the cautious side, as I think Ardell says from time to time.”

    Yes, tj, I do say err on the cautious side, and always do say that. I think it is worth highlighting what that means, as there are many places in the thought process of buying and selling real estate to “err on the side of caution”. It’s not a one step cautious approach.

    For buyers:

    1) Err on the side of caution regarding rates BEFORE going out to look at property:

    Assume a 5.5% interest rate (my advice as of today and that can change as rates change) and do not even go out looking for property, if you don’t qualify to do so at 5.5%. That’s for a conventional loan with 20% down that is not a jumbo loan. For FHA or VA assume 6%. When rates are running at their lowest point in the last 4 weeks, use a .5% to a 1% point spread upward, depending on how tight you are using qualifying standards. If you are using 33% of gross income as a housing payment, use a full 1%. If you are using 25% of gross income, .5% should be sufficient.

    2) Err on the side of caution as to buying at all by assuming values will be going down for an indefinite period of time.

    Plan to be in the property indefinitely and don’t buy a “stepping stone” property that leads you to the next property.

    This looks more like a post than a comment…so I’ll stop here. You get my drift. Erring on the side of caution is multi-faceted and continues for all steps and thought processes. Err on the high side as to the cost of buying and selling. Err on the low side as to expected benefit. Always err on the side of your and your client’s favor, each and every step in the process.

    P.S. This is not new thinking or based entirely on current events. I learned it in grade school and high school from the nuns. Assume you are going to hell…and then do everything possible to try to prevent that from happening. Erring on the side of caution is a life course, not a changeable position.

  82. Roger! I LOVED it. In fact I’ve been thinking a lot about Lancaster, PA and Amish Country recently. I grew up on Lancaster Avenue in Philly, which is “the first paved road in the United States”.

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