Interest rate dilemma

Discussion in 'Stock Market' started by ThinkCritically, Apr 5, 2012.

  1. ThinkCritically
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    ThinkCritically Open to opinion

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    What will happen when interest rates increase again? Will this not reduce demand for housing, thus further dropping the price of homes. Also, low interest rates have helped to prop up the market. If interest rates rise then you will see a flood of risk averse investors leave the market to go back to less risky investments.

    Basically the fed can't raise interest rates right now because it would cause a massive downward correction in the market prices of houses and stocks.
     
  2. FactFinder
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    FactFinder VIP Member

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    If you have any savings or bond accounts you will be happy.
     
  3. Middleoftheroad
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    You are simplifying too much. Interest rates are only one portion of the housing market in total. Like everything it is supply and demand. Housing prices drop when there is a large amount of houses available and few buyers. Interest rates only effect demand, and not supply. Most likely interest rates will remain low as long as the housing market is weak. Many factors go into whether or not someone wants to buy a house, and interest rates are only one factor.
     
  4. ThinkCritically
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    ThinkCritically Open to opinion

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    Yes, I am assuming ceteris paribus so I am simplifying, and I understand supply and demand. You are right that an increase will reduce demand and not supply, and I agree that rates will remain low so long as the housing market is weak.

    So basically interest rates will remain low until the housing market recovers. And the housing market will not recover for some time so interest rates should remain very low for quite some time in the future, right?
     
  5. Middleoftheroad
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    Yea probably. Last I've seen housing is still around 9% over normal price, so housing will be weak until we see that 9% drop and probably a little while after. Its hard to say when housing will pick up, maybe a year from now, maybe a bit longer. So expect interest rates to remain very low for that time. Although, I'm not an economist and this is only my best guess.
     
  6. editec
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    editec Mr. Forgot-it-All

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    Yeah, I think you're right about that.
     
  7. Paulie
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    Paulie Platinum Member

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    Why would interest rates not affect supply? Some people aren't even bothering to sell right now because they can't get enough to break even. Supply in housing is derived from who is actually selling. If sellers leave the market because interest rates rise and buyers decrease, this obviously affects supply.
     
  8. Paulie
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    To answer the OP, the simple layman's answer is the Fed's goal is to have injected enough liquidity back into the market that there is enough cash to go around when it comes time to raise rates and extinguish reserves to quell the possibility of excess inflation beyond their goal, but not take too much away that it affects prices conversely.
     
  9. Middleoftheroad
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    If they can't break even now with prices what they are and interest rates what they are, they are not going to break even in a year or two when houses are 10% cheaper and interest rates begin to go up. Foreclosures will still happen, which will add to supply. People will still move for work or retirement, which will still add to supply. Interest rates going up will have very little effect on how many people are buying houses because there are so few buying now. Interest rates will not go up until housing prices begin to rise which will drive buyers into the market. One reason there are so few buyers now is that housing prices are still dropping. It is a bad investment to buy a house now that in two years will be worth 10% less. Buying a house now will immediately put you underwater in the first month.
    Personally, I am waiting for the market to hit bottom before I buy a house. Every month I save a little more and my potential future house gets cheaper, so my future mortgage continuously gets cheaper every month. I will not buy a house until that trend reverses itself.
     
  10. Paulie
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    This is a tall order for you and the rest of the market. Figuring a falling asset's bottom isn't exactly a simple science, especially with a government intervening as much as possible to try and artificially create one.

    That said, I'm in the same boat. I'm hoping to catch the bottom as well. It's amazing to me how much house is now approaching my target price range. I'm so glad I wasn't one of the unfortunate to get caught at the top.
     

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