4.5% Mortgage Interest Rates?

Shakey Ground — The Temptations

My car got repossessed this morning

Harder times I haven't seen in years

Able to throw me a life preserver

'Cos I'm about to drown in my own tears

The Federal Government is contemplating rebuilding the housing market on shaky ground by attempting to lower mortgage interest rates to 4.5%. Now that they control the GSEs, they might be able to do it — at least temporarily. The Federal government's current borrowing costs are very low. Current yields on 30-day treasury Notes are essentially zero, and the yield on 10-year Treasury Bills is at its lowest level since… I don't know if they have every been this low.

All this means that the government can act like a bank and loan profitably even at 4.5%. So why do they want to do this? It is one way of temporarily supporting prices giving them the ability to control the implosion.

Interest rates went down during the price decline in the early 90s. That softened the impact and made the decline take somewhat longer. When interest rates are declining, bubbles take longer to deflate, and the bottom is at a somewhat higher price point. When interest rates are increasing, bubbles deflate faster, and the bottom is at a lower price point. Mortgage Interest rates during the Great Housing Bubble were at historic lows so a repeat of the steady decline in rates witnessed during the 90s is not very likely. Higher interest rates translate into diminished borrowing, lower prices and a lower bottom. A lower bottom means large bank losses and a weaker economy. Therefore, the government wants to control and limit the drop in house prices as much as they can.

During the early 90s while prices were declining, interest rates were also declining from 10.6% in 1989 to 7.2% in 1996. These 30% declines in interest rates made housing more affordable and helped limit the price declines in the early 90s. If interest rates had not declined, house prices certainly would have dropped further than they did. If the Federal Government were to engineer a mortgage interest rate decline of 30% from the 5.8% they were during the bubble down to an unprecedented 4.1% to match the debt relief of the early 90s, it would help control the implosion, but it will only temporarily arrest the decline of prices. As with any government attempt to manipulate prices, it will probably have unintended consequences.

Of course, also like a bank, the government would be borrowing short to loan long, and if the government's cost of capital were to increase, they would lose a lot of money. In short, any attempt by the government to lower interest rates would be temporary. They would not hold to 4.5% interest rates forever as a permanent housing market subsidy. Therefore, anyone foolish enough to buy when interest rates are 4.5% would know that their future buyer (remember Your Buyer's Loan Terms) would be paying a higher interest rate. So what does that mean for future home values?

I don't know if I can state this emphatically enough, so I will type it in realtorese:


The table above should be very handy to anyone contemplating buying at 4.5% interest rates. You can calculate the loss of home value based solely on increasing interest rates in the future. It is possible we will see 10% interest rates again? You only have to look back to the late 80s/early 90s to see interest rates that high, and that is half of what it was in the early 80s. In my opinion, 8% interest rates are likely during the next several years. When the FED starts raising interest rates after the current crisis is over, 8% interest rates may come faster than you think.


Today's featured property is another speculative venture funded by easy money that is turning out badly. These are not too difficult to find.

2 Madagascar Front 2 Madagascar Kitchen

Asking Price: $539,900IrvineRenter

Income Requirement: $134,975

Downpayment Needed: $107,980

Monthly Equity Burn: $4,499

Purchase Price: $589,000

Purchase Date: 2/26/2004

Address: 2 Madagascar, Irvine, CA 92618

Beds: 3
Baths: 3
Sq. Ft.: 1,750
$/Sq. Ft.: $309
Lot Size:
Property Type: Condominium
Style: Spanish
Year Built: 2000
Stories: 3+
Floor: 1
Area: Oak Creek
County: Orange
MLS#: S522833
Source: SoCalMLS
Status: Active
On Redfin: 286 days

Unsold in 90+ days

Gourmet Kitchen Award

Quiet interior corner location at the end of the cul-de-sac. Upgraded with oak wood floors, ceramic tiles, wood blinds, recessed lighting, added garage cabinets, dinner lights, large rap around yard, long drive way, main floor bedroom with full bath, fire place in living room, master bedroom with private retreat. Gourmet kitchen, shows like a model!

The standards for gourmet kitchens must be falling. It appears you don't even need granite, or stainless steel appliances, or anything better than an apartment to qualify as a gourmet kitchen. I guess I need to remember that lies like this are what we pay realtors for.

  • This property was purchased on 2/26/2004 for $589,000. The owner used a $525,000 first mortgage and a $64,000 downpayment.
  • On 6/7/2005 he refinanced for $529,989 with an Option ARM with a 1% teaser rate, and he opened a HELOC for $90,000.
  • On 7/25/2006 he refinanced again for $592,000 with an Option ARM, and he opened a HELOC for $73,999.
  • Total property debt is $665,999.
  • Total mortgage equity withdrawal is $140,999 including his downpayment.

If this property sells for its asking price, Washington Mutual stands to lose $158,493.


Lady luck and the four leaf clover

Won't be as hurt as I feel all over

My life for one special occasion

'Til you leave in depth the situation

Well well well standing on shakey ground

Ever since you put me down

Standing on shakey ground

Ever since you put me down

My car got repossessed this morning

Harder times I haven't seen in years

Able to throw me a life preserver

'Cos I'm about to drown in my own tears

Well well well standing on shakey ground

Ever since you put me down

Standing on shakey ground

Ever since you put me down

Shakey Ground— The Temptations

70 thoughts on “4.5% Mortgage Interest Rates?

  1. scott

    IR you need more practice writing realtorese- your bold & triple exclamation point sentence contains NOT ONE spelling mistake, better luck next time.

    1. AZDavidPhx

      I have to agree. Very mediocre. I like the caps and 3 exclamations, but we need some spelling errors and letter transpositions in order to make it look more realistic.


      I propose:


      1. Matt

        A relatively new error amongst my college students is a complete lack of knowledge of how to spell “lose” (they use “loose”). So, I propose the realtorese start there.


    1. Bitter Renter

      Thanks, AZ. I’m glad you pointed out that hilarious misspelling, since IR hadn’t.

      (And since this is 2 Madagascar, I’m glad you included an anthromoporphized animal. :cheese:)

    2. MalibuRenter

      So many people profiled on this blog will make/are making/have made the trip from Poser Peak to Poverty Gulch

      poverty gulch

      Yes, this is a real map with real place names.

  2. Roo

    The government will subsidize today’s buyer at the cost of tomorrow’s buyers. By printing money, the US dollar will use value, thus inflation will come back haunting us. Therefore, the FED will have to kill the inflation with high interest rates. 8% is not unrealistic, but neither is 10%. In fact, it could look like the early 80s at some point with 15% plus. Pile down a big downpayment and make sure to buy when interest rates are so high that nobody else wants to (or can) buy.

      1. Chuck Ponzi

        The current problem is deflation. They are fighting today’s battle, not tomorrow’s war.

        Right now, FED and Treasury policy is like Sherman’s march to the sea. Unprecedented, destructive, and completely on its own. This is scorched earth war against deflation, and by proxy, savers. No one knows what comes out of it, because, frankly, no one has every done it before. Everyone is waiting with bated breath on what happens next. With that said, it was much easier to predict the outcome of the housing bubble than the outcome of current policy since everything had largely happened before on a smaller scale just some 15 years earlier. Noone has good information about the great depression, or even policy decisions from Japan of the 1990s since the decisions were significantly different.

        I think you’d be surprised how much the rest of the world is hurting right now too. There was no “decoupling”.

        Chuck Ponzi

    1. dafox

      I’d love to see interest rates through the roof for 2 reasons:
      1. Everyone is in the same boat with rates. It just makes the borrowing amount lower, which = lower sale price.
      2. I’d much rather have a lower sale price cause I can always refi later when rates drop again. I cant do that if I have a high sale price and a low rate when I buy!

      1. Perspective

        As true as the second argument may be, I don’t like it; it sounds too much like realtors promising that something “always” happens in the future with certainty.

        Don’t forget another argument – With a sky-high interest rate, you should get a rock-bottom price, and then a much larger percentage of your housing cost is deductible.

      2. tlc8386

        The government does not want a lower housing prices because the tax base would be lowered–lowering interest rates would help those who can’t refi either because of not qualifiying or banks not willing to lend. So the banks have to step in and do something for those folks caught in the trap.
        For those that abused the system they should lose but they are walking with their helco’s. How could banks be so stupid to loan so much? So much fraud in this area. And we all have to pay for it through higher taxes.

  3. OakCreekRenter

    Not to crash the party, but shouldn’t the saying be:


    Think about it for a second. If someone buys a home today at 4.5% interest rate, keeps it for 20-30 years, will they really lose money? If not, then it’s not really “anyone”, but really it’s the speculators and flippers, right?

    Or am I missing something?

    1. Alan

      I was going to raise the same point – if you are buying a house to (gasp!) live in it, wouldn’t you welcome getting the same house with substantially lower monthy costs? It seems to me that low interest rates only hurt when you are speculating with houses, or buying at the very limit of your ability to pay.

      Or is the urge to buy the most that you can afford or beyond so ingrained that almost no one can resist it?

    2. IrvineRenter

      In nominal dollars, you are probably right. If interest rates creep up slowly to 8%-10% over your ownership period, the impact of appreciation through wage inflation may counteract the loss in buying power caused by rising interest rates. At some point in the very distant future, nominal prices may creep up above your entry point.

      Of course, in inflation adjusted terms, you will not make money. Let’s say you bought a property today for $500,000, and you sell it in 2028 for $600,000. In nominal dollars you made a $100,000 gain. When you adjust the $600,000 for 20 years of inflation, the buying power of those $600,000 will almost certainly be less than the $500,000 you are paying today.

      1. Perspective

        I appreciate these arguments, but they are getting away from your basic common-sense argument that the price of any given house shouldn’t exceed equivalent rents or median incomes multiples.

      2. RE in the LBC

        A hypothetical:

        What about a buyer who keeps the place as a rental property? No future sale in 2028 or any other time.

        For something you plan on hanging on to as an investment property (and never have to realize the value losses created by 8% interest rates) wouldn’t this make sense?

        Are there any disadvantages in that situation? I imagine there must be, but they’re not immediately obvious to me.

        I guess refinancing in an 8%-10% world would be difficult because of the reduced value those rates bring–but with a 4.5% fixed rate, you wouldn’t ever need to refinance in search of a “lower” rate.

  4. maliburenter

    The Realtor spin will include telling people that upcoming interest rate rises mean they should buy now or be priced out forever.

    I think that a substanial number of buyers will look for an expiration date on the 4.5% loans. If that date is known, a large number of people will wait until just before that date.

    I am not a very big believer in interest rates’ effect on housing prices, especially in the short run. Interest rates don’t explain that much of the variation in home prices.

    However, I think the effect of this program will have a lot to do with whether refis are allowed.

    1. IrvineRenter

      In my opinion, this would be a great program if it were limited only to refinances. We could clean up much of the problem with bad loans and get people into stable financing. If they open it up to new purchases, they are just trying to temporarily re-inflate the bubble which just delays price stabilization at affordable levels.

      1. Perspective

        But then how do you solve the underwater issue? To use a loaded term, wouldn’t it be “unfair”?

        e.g. I have the ability to bring cash to the refi table to cure the underwater portion of my mortgage. Is it “fair” that people with savings get to refi at 4.5% but borrowers struggling get foreclosure?

        1. AZDavidPhx

          The people who are underwater have to chalk it up to a learning experience and come to reality that they are paying for a place to live (just like renters) and be “OK” with that outcome even if they will not be able to flip their house in the near term. Time to start paying down debt. Don’t borrow money unless you plan on paying back every penny with your hard-earned income.

        2. IrvineRenter

          No workout program is going to be very fair. I am against all bailout programs in principal because of it. However, if they are going to do it… part of the workout will probably also require principal forbearance to solve the underwater problem. If you have cash, you would still have a smaller mortgage, and you would get the better interest rate. For the borrower who has does not have cash, he gets a larger loan balance (which may need to negatively amortize to keep the payments affordable). He gets to stay in his home, but there will be no profit from the resale. If implemented, responsible homeowners get the benefit of a really low refinance interest rate. Irresponsible homeowners get to stay in their homes, but they forego any capital gains. Renters who will become homeowners will get to watch prices continue to drop and get opportunity to enter the market at a lower price point.

    2. tlc8386

      I think the system is broken for awhile now as long as foreclosures continue appraisals should come in lower so no matter what interest rate the pricing of the home must come down. Till supply meets up with demand. So buying at low rates does not mean your home will not continue to drop. And as long as we have job loss housing should continue downward. So renting is the best option now and put your money into something else. Continued deflation for now. jmo

  5. d92782

    I saw this house with my agent a while back, the price seemed reasonable for my area, then we saw why it wasn’t selling when we looked inside. It’s a tri-level condo. The living room is on the bottom, the kitchen and family room is on the second floor, and the bedrooms are on the top floor. The lot size is probably 800 sq.ft. You’d never need to go to the gym with all the stairs you climb everyday.

    1. SoOCOwner

      We owned a condo like this once. It was a nightmare to haul the groceries up the stairs. Of course, we were younger back then, but never again!

      1. pianist

        What happens as the population ages and the formation of new families fails to keep pace? I see the folly of these “billy goat” homes and believe they will become increasingly more difficult to sell as the years go by. Single level homes will be the most popular, whether SFR’s or stacked condos.

    2. Walter

      “The living room is on the bottom, the kitchen and family room is on the second floor”

      Guess this is why they left out the “great for entertaining” clause. Not so easy to get the goods from the gourmet kitchen to your party guests.

      Although during the bubble years you could of hired a wait staff to handle the moving of goods between levels. Now, not so much.

    3. Priced_out_IT_guy

      Tri-level condos/homes IMO are only acceptable when you enter into the middle floor (as is when the house is on a hillside) and the kitchen/living area is on middle floor.

      If I forgot my sunglasses on floor #3 and I’m at my car on floor #1, climbing two flights of stairs is just ridiculous even for someone in their 20s.

      1. jhill

        What this kind of arrangement accomplishes is that the ground floor is just wasted space (you could have an exercise room down there, you’re going to need it to stay in shape for the stairs — or maybe a home office for somebody who needs quiet), because everything is going to happen on the kitchen/family room floor. I lived in a house arranged somewhat like this when I was much, much, much younger and even the kids didn’t want to be down there, because they wanted to be around Mom. We used the lowest floor basically to store junk. At $309 bucks per square foot, that becomes a very, very bad idea.

  6. Nick

    Anyone who borrows U.S. dollars at 4.5% fixed to purchase hard assets and then experiences a period of very serious inflation will make out like a bandit.

    Sure, high interest rates make monthly payments go up. That means people can afford less house, and so on.

    But there’s more than one variable here.

    If you expect a sustained period of high inflation (and you should, that’s basically official government policy now) then you should act accordingly.

    Inflation is basically a way to redistribute money from lenders to debtors. You pay back the loan with dollars that are worth far less in the future.

    If housing is overpriced, it’s overpriced, sure. But in an inflationary environment this turns on its head. It’s very clear what the government is trying to do, they are going to try to print money to back out of this over-leveraged economic situation we’ve found ourselves in.

    Do we have tremendous debt to foreign countries? Yup. Do firms owe money they’ll have trouble repaying? Yup. Are American families grossly overextended? Yup.

    Inflation will sort of get rid of those problems. It will cause all sorts of other problems. But I don’t think anyone should be confused at this point as to what the next plan is. The Obama administration is going to propose massive stimulus and spending without corresponding revenue increases. They’re going to fire up the printing presses and try to float all the boats out of the hole they are in by running up inflation for awhile until the real value of all this debt is under control.

    Inflation will cause some ugly problems in the economy. But if you’re buying at 4.5% fixed and don’t plan to flip, you’re hedged against inflation.

    You’ve pointed out over and over again that home prices are still way too high. But you should address the subtle and interesting concept that home prices could continue to fall dramatically in REAL terms, while the actual prices stabilize or even rise in NOMINAL terms, if inflation sets in.

    That means you’re absolutely right, homes are still overvalued. But that also means that their selling prices may increase, and those so hedged against inflation could do quite well.

    You may be right (especially for OC) but your statement is very definitive. Consider the possibility of heavy inflation as possible, in my opinion probable, and account for that as well.

    1. IrvineRenter

      “Anyone who borrows U.S. dollars at 4.5% fixed to purchase hard assets and then experiences a period of very serious inflation will make out like a bandit.”

      In theory, this is true. However, since asset prices are grossly inflated already, super low interest rates plus inflation is necessary just to bring supporting values up to current pricing. That is why the government is considering doing this.

      If asset prices were reasonably valued, I would agree with your assessment, but since they are not, I don’t.

      1. newbie

        If I beleive the finance guys, $140 for oil is a reasonable price and the current Irvine housing price is also reasonable.

        How to price the rent and therefore house price, in such a deflationary mode?

        I just read the Fed Reserve analysis on income to debt service. Too bad they missed to point that the analysis should be median household income to debt (instead of debt service). Same goes for federal budget “deficit” instead of actual total debt.

        Great analysis IR.

    2. AZDavidPhx

      The problem here is that wages are declining and unemployment is increasing – despite the “inflation adjusted” shade of lipstick that has been smeared on the latest round of median income data.

      California is especially vulnerable to this recession because of the inflated costs of living. It simply does not make economic sense for many of these companies to maintain shop in a weak economy when they can move to other locations where costs are much cheaper and the locals don’t cry poor for being unable to make ends meet on six-figure incomes.

      The fact that Californians have been enjoying their inflated salaries within the illusion of a strong economy for so many years is going to be a nasty sting when the situation reverses itself and the economy begins to deteriorate.

      Next year is going to be ugly.

    3. Matt

      Let us not confuse general inflation with wage inflation.

      As someone with 6 figures of PhD debt and working for the state, I can tell you that general inflation hurts me more than it helps. Yes, the dollars I’m paying back to my lenders are “worth less”, but I have fewer of those dollars in my pocket because of what I have to pay for food and other consumables. If a person’s income has a weak relationship at best to general inflation, then they can be hurt.

      Arguments about who “inflation” hurts or helps are very general. I prefer not to generalize about inflationary effects because they vary so much from situation to situation.

  7. Priced_out_IT_guy

    “Inflation will cause some ugly problems in the economy. But if you’re buying at 4.5% fixed and don’t plan to flip, you’re hedged against inflation.”

    Against inflation yes, but not against rising interest rates, which would be the result of the government combating inflation. The higher cost of borrowing will lower the real value of your property.

    I could see a case where 4.5% interest rates would be beneficial. Lets say you’re buying a starter home in SD today where we’ve already seen huge price declines of 50% or more. The day after 4.5% rates go live, the nominal value of the home you’re going to buy stays the same and you reap the windfall of cheaper money. So long as the 150 basis points or so you get off your loan hasn’t been priced into the nominal list price you win. Of course selling just a couple of years down the road could prove difficult depending on where rates have gone.

    Perhaps IR can give us some examples of down-payment burn. Ie, if you put 100K down, and you sell your home 5 years later for 25K less because interest rates shot up and nominal prices decreased. That would be 5k/year of down-payment burn. But if you saved 5k/year on rent savings without factoring equity buildup you would still be ahead and therefore not a fool.

    1. Chuck Ponzi

      You’re assuming the “government” will combat high inflation.

      Inherent in the assumption is that the “government”, or more aptly, the FED, which is not part of the government has to be a willing party to inflation. I seriously doubt that if we are pursuing a blantant policy of devaluation that we would at the same time fight that. Maybe I’m wrong.

      And, let’s be more honest here. The only “inflation” that is going to help here is wage inflation, which causes the wage-price spiral (ala 1970’s)


  8. Nick

    It’s two countervailing forces.

    Increased interest rates (in a vacuum) generally do have the effect of lowering real estate prices.

    Increased inflation increases real estate prices in nominal terms, though not always in real terms. But once yo buy you pay in nominal dollars.

    So in a period of high inflation and high interest rates those two factors work against each other. I just would have liked to have seen some recognition that there’s more than one thing going on here. Interest rates aren’t going to spike most likely without inflation to go with it. And inflation (once the current deflationary spiral runs its course for a year or so) seems like an absolute given based on current government policy.

    The counter argument would be that it’s much better to buy with lower principal and a lower nominal cost, then refinance assuming rates come back down one day, rather than buy with higher cost and lower fixed rates and wait for things to swing back to normal.

    In reality, it’s not clear — it really depends on the relationship between interest rates and inflation among other things.

    This is the Irvine Housing Blog. So maybe the above advice is flawless for Irvine. I don’t know. But in general, I suspect some people may well make out very well by locking in 4.5% interest rates on upcoming purchases.

    Borrowing with substantial leverage at an interest rate lower than the rate of inflation is extremely lucrative. So much so that it can withstand a fair bit of continued asset depreciation in real terms, and still be a very good deal.

    But IrvineRenter – I’d love to hear your thoughts in general on the broader issue. My theory is that the government is going to use inflation as the tool to get out from under the debt crisis, and that will have some effects on the housing market that may not be built into people’s current thinking. I’d be curious to know your thoughts on that if you have any.

    1. no_worries


      I’m no economist, so I’m just barely following along.

      I wonder, though, if you’re taking into account that IHB pretty much considers it a given that current home prices are significantly overvalued (priced beyond affordability) even at 4.5%?

      As IT guy above said, perhaps purchasing a low-end property that has seen a massive (and expected) price hit already, at 4.5%, makes the equation more balanced; but purchasing one that has yet to fully adjust from the bubble is a losing proposition regardless, and moreso if interest rates adjust by next sale.

      Or maybe the discussion is just “It’s not a good idea to buy ANYTHING at an artificially low interest rate” in which case the actual housing market is irrelevant.

      As for forced inflation solving the credit woes, the idea appears to make sense, but aren’t there other significant downsides to inflation? For example wouldn’t wages need to increase at the same advanced rate?

      Thanks for the education.

      1. Nick

        “Or maybe the discussion is just “It’s not a good idea to buy ANYTHING at an artificially low interest rate” in which case the actual housing market is irrelevant.”

        Right. That statement is inaccurate. Of course it’s a good idea to buy something at an artificially low interest rate, versus buying at a non-subsidized rate.

        I’m just saying the same thing as “It’s better to take the mortgage interest deduction, rather than leave it off your tax return, if you’re entitled to it.”

        IrvineRenter’s opinion, and it’s a very well informed one, is that in the aggregate this still doesn’t make buying a good idea.

        My response is — it depends, it’s not so simple. If housing prices have another 20% or more to fall, then a couple points lower interest rate doesn’t suddenly make that a good investment. He further argues (accurately) that if interest rates rise then prices will fall further, leaving you even worse off.

        So he’s advising caution in thinking that some lower government rate is a panacea. It doesn’t affect that fundamental problem. I think we sort of violently agree on that.

        My point is that such a definitive statement:


        Is a hyperbole. Someone who buys at that rate might well do OK. And one of the reasons is that if inflation kicks in they may will see nominal price appreciation EVEN IF housing prices continue to fall in real terms.

        Another commenter above posits that even if inflation does happen, it might not be wage inflation, in which case it wouldn’t help that prospective buyer as a dollar might be worth less but their nominal salary isn’t going up in response. In fact other expenses are going up so they might be worse off.

        All very valid points. I just think you can’t analyze this in a vacuum, you have to consider the possibility that inflation will outstrip the negative effects of higher interest rates on home prices. Debatable, highly debatable. And I bet in OC it’s really not that hard a call.

        So I respect that argument, it’s probably way more right than wrong. But it’s so definitive and all-caps that it stands to withstand a little criticism. As a counter-possibility it might well be the case that many of the price drops have already been realized — hell the real estate crash is pretty well formed by now. I read this blog often, I know IR is of the opinion, in OC at least, that there’s a lot of room left to drop. I don’t disagree, he knows this market way more than I could ever imagine to.

        But for someone with the means, and a need for housing, it might well turn out to be a better deal to buy now assuming they can get a good enough deal, and take advantage of that rate. If inflation rises sharply, they’re effectively getting free money. Investing that free money in residential real estate may or may not be a good idea. But free money, by itself, is a good thing to consider taking advantage of. And people tend to buy one primary residence, not the entire housing market. If that residence has a price that’s fallen sufficiently, and the usage value is acceptable, then some people might well benefit. EVEN if the value of their property declines in the near term.

        It’s been a long time since we’ve had to worry about inflation. If it’s imminent then being hedged against it will be a big thing to think about it.

        Right now we’re experiencing serious deflation. And we might well be entering a period of stagflation.

        But the reality is we can’t predict the future. And as such we can’t say with such utterly unequivocal emphasis that everyone who takes what’s essentially a subsidized loan will be worse off. Prima Facie the prospect of getting below market money lent to you is something always worth exploring and running out under a couple different scenarios. Ignoring possible inflation during a period of “quantitative easing” is a folly, IMHO.

        More on “quantitative easing” here:

        It’s worth remembering that the government can change the rules. They’ve done it before, and they can do it again.

      2. Perspective

        While IR avoids hyperbole for the most part, another comment he has made mirrors the one today: “Bubble buyers will suffer catastrophic financial repercussions.”

        A bubble buyer paying $600k at the peak for a home worth $400k in 2012 is no worse off than a family that has a child ($200k cost 0 to 18) or that buys nice new cars every few years.

  9. Hormiguero

    I totally agree with the conclusion, IR, but question the assumptions in terms of interest rates. Also, there is the flipside of the coin, a 400K house @ 4.5% is possibly cheaper than a 300K one at 10% (though I know this is precisely the mechanic which got us into this mess as a society).

  10. Dog

    There is another reason why it’s much better to buy when interest rates are higher: some ongoing costs, especially property taxes and insurance, are tied to the home’s purchase price. Buying for a much lower price as a result of high interest rates carries a huge advantage over buying the same home at a higher price with the same monthly mortgage payment due to lower interest rates. When all monthly costs are factored in, it’s better to buy when rates are higher.

    Of course, in a logical world all homebuyers would take this into account and would bid home prices up in a high interst rate environment to counteract for the effect of lower property taxes — but I don’t think most homebuyers are that smart. Very few people really take into account any costs other than the monthly mortgage payment.

    1. lowrydr310

      I was going to comment on this; good thing I read through all the comments here before posting.

      I didn’t do the math, but it looks like that 28% debt-to-income ration calculated in IR’s post only considers the value of the loan. Aside from the mortgage, you have taxes and Mello-Roos, maintenance, association fees, and energy costs!

      That last one bites hard; the bigger the house, the more expensive it is to heat and cool. I have a friend who bought a ‘cheap’ house in Texas during the peak of the great housing bubble. During the summer, her electric bill is well over $400, and her house isn’t even that large.

      1. tlc8386

        “Aside from the mortgage, you have taxes and Mello-Roos, maintenance, association fees, and energy costs! ”

        don’t forget insurance and if you include earthquake you will be paying a very nice amount–

    1. AZDavidPhx

      Take 20% of the asking price $ and divide the result by 24 months.

      It’s showing how much money will evaporate from your equity if you buy today and the house loses 20% of its value over the 2 years that follow from your purchase.

  11. awgee

    Here is what 4.5% interest rates will do for the housing markets.


    If all the housing markets needs is low interest rates, why doesn’t the government just loan at 3%, or 1%? Heck, why not just pay someone to “buy” a home?

    1. Nick

      That’s a little different. I just posted the same link right above you. That has to do with people who are already in trouble, just showing that workouts aren’t working. Though in fairness if they work half the time you could argue that it’s worth doing them, as it’s better than the alternative, which is 100% of the same people being in foreclosure. That’s arguable at best though.

      And though it would be a terrible idea for many, many reasons, if the government loaned at 1% or paid people to buy houses it would most likely make it much more beneficial for you, comparatively speaking, to take them up on it than not, and would indeed have the effect of increasing housing prices over what they might otherwise have been. Though again if they are plummeting it might not stop that. But it would have upwards pressure on prices, undoubtedly.

  12. OCRefugee


    Only in CA, FL, AZ, and some other overheated markets.

    I fled Newport Beach for Pittsburgh summer 2007, the housing market here has slowed a bit, but prices have remained stable (up 1.7% 2d qtr, down .8% 3rd qtr) as they never got crazy in the first place. People here did not buy 3 more houses as an investment to flip.

  13. Ex-OC New-RC

    Its simple to me. If you need a place to live and buying a home today (w/ 10-20% down) results in a lower monthly payment than renting, then you should buy! Places like Corona, this is already the case for a lot of good properties. However, there are only a few areas in Orange County that this is the case.

    1. no_worries

      What if you think rent is going to drop both because of the present and upcoming economic issues as well as to remain competitive against dropping home prices?

      I mean what if rent is currently over-priced?

  14. Kelly

    I agree especially with the markets being so low. I mean if it matches your rent and values are near the bottom, then now is the time.

  15. JimJones

    So basically you are saying don’t buy a home when interest rates are set artificially low because by definition the purchase price will conversly be artificially high and as a consequence as soon as interests rates rise your home’s value (what someone can\will pay) goes down. So the smart move would be to purchase when rates are high since this should suppress asking prices then refi into a lower rate when rates go back down.

    I listen to that real estate infomerical on 97.1 on Saturdays just for laughs and they are always repeating the bogus argument that you should buy now when rates are low and home prices are high because according to their math you come out ahead. No one ever calls in and points out that you can always refi into a lower rate later.

  16. Ex-OC New-RC

    Rent could be over-priced. However, I believe rent is tied strongly to wages. Big-time unemployment will lower rents. Large foreclosures numbers tend to increase rents (people have to live somewhere). In the end, I don’t think we see that big of a rent price drop. It will be mild at worst.

    4.5% rates will drop mortgages below current rent costs in alot of areas. It makes the equity burn (which will still happen) almost worth it.

  17. norcaljeff

    Any FOOL who buys a home at 6.5% v. 4.5% is a fool! Or someone who buys now when the rate might go to 0%, is a bigger fool!

    1. Bitter Renter

      That’s just the federal funds rate that they’re talking about going to 0%, not mortgage rates.

  18. headless unicorn guy

    Gummint gravy pouring in,
    All is happy and bright;
    Dream of condos to flip flip flip
    ‘Cause Santa Claus Comes Tonight!

  19. newbie

    What makes you think the legistators care of the taxpayers will be stuck with the bill 10 to 15 years from now? They will be retired by then. :<

  20. norcaljeff


    If you bought right at the beginning of a short term bull market you could probably get enough panicked buyers that you could get out of it before rates went up. If the world markets continue to flee to the US for safety and global banks buy Tbills instead of lend out their cash, rates will stay at or below 4.5%, as long as the govt wants to keep them there. If rates held for a decent amount of time or fell, you could probably make and quick profit. I’m just sayin 🙂

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