Interest rate question- about rising rate.

[Gregorian]

Does anyone have enough experience or education on this subject to know what it would take for the rates to start going up? I have my own theory that when interest rates go up, as they must, real estate values will fall.

I'm asking because I am looking at houses to buy, and when I go and see them, I simply can't believe that a tiny home in some tiny town can be worth so much. I just cannot see a puny house that sold for under ten grand in the fifties, and is worth $200k right now, is going to be worth $300k in two years.

Combine that with higher rates, and I don't see why I should continue buying houses. So I think the interest rate question is important to have a handle on. Is it just when Greenspan says so? I haven't any idea. I'm just a lucky bum who bought and sold at the right time.

[phantom power]

1. It goes up if (and only if) the Fed raises the prime rate.

Since I've been paying attention, the prime rate seems to have been used as a governer. They raise it, if they want to slow the growth of the economy, they lower it, if they want to goose the economy.

Our current economy has become so dependent on cheap credit, that they are very very motivated to keep the rates low, even though they probably should be higher than they are.

Back in the day, Greenspan raised the prime rate quite high, to curb the double-digit inflation of the late 70s (early 80s?). That was the day when CDs were the investment rage, since you could get like 15% returns on them. If you were one of those people who was lucky enough to have a job, and money to invest.

[Gregorian]

6. I should have asked when we expect inflation, then.

Too bad my post is a selfish one. If we had a real estate forum, I'd have posed a different question.
But I am very leery to buy, when things look so ready to tumble into the gutter.
Maybe I should ask when we expect inflation. Maybe I've opened a can of worms by asking anything. Haha.
And maybe I have answered my own question- I am affraid to buy real estate. And there is an instinctual reason- things don't look rosey.
Maybe I need a cup of coffee before posting. This didn't make a lot of sense. The real sense is that when one tosses out a hundred grand, they had either be lucky, or know what they're in for. I don't feel lucky any longer. And I don't see how real estate prices could possibly go any higher.

[phantom power]

9. Inflation has started, and it will continue.

It's being driven by oil prices, and also by the falling value of the dollar on the world market.

I agree, it's a scary time to think of taking on long-term debt. On the other hand, you've got to live somewhere. If things continue to get worse, I suspect we may see a return to the days when extended families shared houses. It spreads the risk, when the job market is uncertain.

Of course, this can also be construed as an argument for buying now, since interest rates are probably only going to get worse.

Tough times are coming. There are no easy choices any more.

[Warpy]

2. Greenspan favors slow increases in the interest rate

but the general trend has got to go up. It's the Greenspan way of dealing with inflation (which is back) and the country has got to find a way to make its debt more attractive to other countries, and higher interst rates meaning a higher payoff when the bonds mature is just what will do it.

They're sneaking the rates up hoping not to pop the real estate bubble on the coasts, but I doubt it's going to work. I suspect we'll see a decline in housing prices. I'm doubtful that we'll see a sudden, catastrophic decline.

Then again, there are so many other factors at work besides the interest rates at the Fed that just about anything can happen.

[Gregorian]

7. Great explanation.

Thanks. That's the first time I've ever understood the tie between interest rates and bonds. And paying them off when they mature. Oh, I feel all smart now. :) Really.

[illflem]

3. Read this article just yesterday

On average renting a home is 7% cheaper than owning.
http://money.cnn.com/2005/04/05/real_estate/rentprices/

[Massacure]

15. But by owning a house, your guaranteed to keep a portion of your wealth.

When you rent, someone else gets that money.

[On the Road]

4. Rates Have Already Gone Up

and almost everything indicates they will go up further. Remember, recent rates were at 30-year lows, so there's nothing out of the ordinary about they're being higher. In the mid-90s, I remember mortgages being about 8½%, meaning that you would pay $1,000 a month for a $100,000 house. In the early 00s, that went down to about $600 a month. The back side of that is IF rates rise to the same point, new mortgages will go up 40%. That's a hellacious rise and will definitely affect home prices.

Mortgage payments are so high now as a percentage of income (about half) that people simply can't afford to divert any more of their paychecks to mortgage payments. So any further increase in rates should bring prices down and cause a wave of foreclosures on folks with ARMs.

Even if lower housing prices are offset by higher rates, you're still better off. A cheaper house with a higher-rate mortgage is preferable to an expensive house with a low-rate mortgage, because you can always refinance if rates go down again, you can a slightly bigger tax break, and you're less likely to end with killer negative equity.

I would advise holding off until the winter to buy. In a lot of areas, the market is already starting to soften. And when you do look, check out alternate avenues -- craigslist, investor realtor boards, foreclosures, wholesale brokers, etc. Especially if you don't mind a little fix-up work. I just bought a small rowhouse as an investment property for about two-thirds of its appraised value.

[illflem]

8. Home Foreclosure Listings Surged in March, Study Shows

NEW YORK (Dow Jones/AP) - In what could be a crack in the housing market's sturdy foundation, the number of foreclosed homes put up for sale rose 50 percent between February and March, according to a new study by Foreclosure.com.
The increase is one of the biggest monthly spikes Foreclosure.com has seen since it began tracking the market in 1999, according to Jim Houston, vice president of the foreclosure listing service.

The survey, released Wednesday, showed 28,190 foreclosed homes were put up for sale across the country in March, which is 50 percent more than in February.

http://ap.tbo.com/ap/breaking/MGBFGGY197E.html

[On the Road]

11. And In Addition, There's a Big Rise in "Almost" Foreclosures

You know those little signs you see on telephone poles "We Buy Homes"? The people who put those up do a lot of their business taking over people's mortgages who are about to be foreclosed on.

That's how I got that cheap rowhouse. If the brokers choose not to buy it themselves, or are short on cash, they'll resell it for a small markup. It's worth calling some of those numbers just to make contacts. But you have to be able to close quickly.

In Baltimore, HUD foreclosures almost dried up over the last two years. Partly due to these brokers, I believe. But as you say, they may have started to rise again. They can be great deals with a little legwork and a little improvement.

[Gregorian]

10. Different strokes for different folks. (ugh. Sorry about that)

I paid those rates in the 90's. I still made money. It gets complex. Where one is buying. Why one is buying. I'd have bought anything back then. And I did. A compete fixer, probate. But recently I bought a full price ranch with barn and house, and the whole deal. Because I'm at the end of my money making spree. So now I'm trying to buy something with the cash I have left. I am tired of fixers. And I won't have a mortgage. So it's different- if it declines in value, I lose. But I agree with everything you said. In fact, I'm part of the problem, in that I rode the rising price wave. Even so, I hate the volitility of prices. I would love stable values. But then I'd have never made the cash to afford what I just bought.
Maybe I really have asked a question about catastrophe. Something noone can really predict. Because the most likely scenerio is the one you mention. Things will naturally go back up. They were 18% rates back in the 80's. Now I really need another cup of coffee. Make that a cup of morphine. :)

[On the Road]

13. What You Did Sounds Like the Right Thing

You sold at the right time, made your money and plowed it into something you really want.

Fixer-uppers are definitely "ugh." No question. Although it gets better with repetition. It's just that the potential returns are so high compared to any other way of building up savings for retirement. A lot of people here have difficulty buying into the current market and I was just trying to pass along ways of doing that.

I have five small rowhouses in Baltimore. I'm not particularly good at managing them, but the absolute worst case is breaking even. I want to pay them off in fifteen years and cash in at about the time I retire. That will be a good chunk even if they don't appreciate that much.

[nashville_brook]

5. the "received" wisdom is that people buy houses

one a monthly amount. if interest rates are cheap, houses can be more expensive and the monthly payment will still be within reach. as soon as interest rates go up, people won't be able to afford as much house -- so, that leads to stagnation in the market and falling prices.

but that's not the whole story when it comes to real estate. i think you can readily apply that to *mass market* housing -- suburbs, exburbs -- but the same doesn't hold true when you look at emerging (reemerging) neighborhoods. older homes in revitalized, walking neighborhoods are going to remain a premium as gas prices soar.

then there's the potential to invest in land while interest rates are low.

so, you're right as long as you are looking at mass market housing, but there's much more to take into account -- and always a way to make money in real estate.

my advice is now is a bad time to invest in property that is meant only to be a rental -- UNLESS -- you are purchasing a retirement home and wanting to rent it for a few years until you are ready to use it. now is probably a decent time to buy that little cottage in an up-and-coming city neighborhood with groceries, restaurants, work and shopping within walking distance.

[Gregorian]

12. That's exactly what I've been thinking.

I'm looking at this little town with no sources of income. Not good. It's not the fixer of the neighborhood. It's the primo little rental. And that would be good if values were to stay, or rise. And it's not my primary residence.
Land...Oh.... I want my 200 acres back. This whole escapade is a way of making enough to buy back the acreage I sold, and which rose in value so much I could never afford to buy it back. But that's another story. And who buys land with a loan. Yikes. Scary.
Thanks. These are all great responses. I learned real estate by the seat of the pants, at high speed. Somehow I learned to love it. I enjoy hearing others tell their thoughts.
You've helped me think a bit more carefully about tossing my cash into the wind, again.

[On the Road]

14. "Now is a Bad Time to Invest in Property..."

That is absolutely true in general. I work in Montgomery County, Maryland and have avoided buying because the prices are out of sight. In Baltimore, however, prices have been extremely depressed for twenty years, and you can still get houses for under $40K in working-class neighborhoods if you look. In a case like that, or the emerging neighborhoods you refer to, any price crash will probably be milder and shorter-lived.

It's good to be prepared, though -- know the markets, keep in touch with sources, know your price range and lenders. Then when the right opportunity comes along, you can move fast. I wish I had known some of this stuff in my 20s.