Interest rate dilemma

[ThinkCritically]

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.

 

[FactFinder]

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.

If you have any savings or bond accounts you will be happy.

 

[Middleoftheroad]

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.

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.

 

[ThinkCritically]

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.

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.

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?

 

[Middleoftheroad]

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.

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.

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?

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.

 

[editec]

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.

Yeah, I think you're right about that.

 

[Paulie]

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.

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.

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.

 

[Paulie]

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.

 

[Middleoftheroad]

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.

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.

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.

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.

 

[Paulie]

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.

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.

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.

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.

 

[Vidi]

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.

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.

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?

Actually, I think that, as counterintuitive as it may seem, because economic trends are based as much on psychology as actual economic theory, that a small rise in rates would create a sense that the housing market is recovering, thus cause more people to move back into the market.

 

[ThinkCritically]

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.

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?

Actually, I think that, as counterintuitive as it may seem, because economic trends are based as much on psychology as actual economic theory, that a small rise in rates would create a sense that the housing market is recovering, thus cause more people to move back into the market.

I like the point that you are making here, but it would not remedy any of the real problems that are occurring in the housing and job markets. Not to mention the fact that the market would not be happy with the fed for increasing rates.

If the fed raised rates tomorrow would you go out and buy a house? I think you are underestimating todays homebuyers. Everybody is going to wait this one out until they are certain that the bottom has been reached. Problem is the housing market is still being propped up, so we won't see the bottom for some time to come.

 

[editec]

When it suits the MASTERS needs to raise interest rates they will do so.

If it isn't clear to ya'll yet that they do what they do for their interests, and not for this nation's interests, then I am pretty sure nothing anyone can say will wake you up to that fact.

 

[Vidi]

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?

Actually, I think that, as counterintuitive as it may seem, because economic trends are based as much on psychology as actual economic theory, that a small rise in rates would create a sense that the housing market is recovering, thus cause more people to move back into the market.

I like the point that you are making here, but it would not remedy any of the real problems that are occurring in the housing and job markets. Not to mention the fact that the market would not be happy with the fed for increasing rates.

If the fed raised rates tomorrow would you go out and buy a house? I think you are underestimating todays homebuyers. Everybody is going to wait this one out until they are certain that the bottom has been reached. Problem is the housing market is still being propped up, so we won't see the bottom for some time to come.

Actually, Ive been investing in real estate now for the last two years and am looking at two more properties as we speak. A rise in interest rates would cut into the profits I'll be making but a small increase would not deter me from investing at all. The profit would still be there for me to gain after all.

AND...if the rates were raised, it would signal that the bottom has been reached, alerting everyone that the time to buy is RIGHT NOW.

Which it is. My last property I picked up for 130k and resold for 175k a month after I got it. The house was appraised at 275k just three years ago.

So if anyone is in the market for a house, get it NOW. The bottom has been reached. House flipping has never been easier and if you get stuck -can't sell- renting the house will provide a tidy profit as well. I currently have four rental houses.


ETA: all that being said, I do not see residential construction jobs coming back for at least 6 years. There were far too many new houses going up before the crisis. The Baby Boomers are retiring and the overall demand for new houses will diminish over the next ten years. With so many homes being abandoned by upside downers, there are too many homes that have been "left to rot" so to speak which provides an amazing fixer upper market. Those homes can be had for a song and a dance ( provided you have the credit ) and there's enough of them out there to stall the need for new homes.

 

[Middleoftheroad]

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?

Actually, I think that, as counterintuitive as it may seem, because economic trends are based as much on psychology as actual economic theory, that a small rise in rates would create a sense that the housing market is recovering, thus cause more people to move back into the market.

I like the point that you are making here, but it would not remedy any of the real problems that are occurring in the housing and job markets. Not to mention the fact that the market would not be happy with the fed for increasing rates.

If the fed raised rates tomorrow would you go out and buy a house? I think you are underestimating todays homebuyers. Everybody is going to wait this one out until they are certain that the bottom has been reached. Problem is the housing market is still being propped up, so we won't see the bottom for some time to come.

Yes it would make me go out and buy a house. What I am trying to do is get the best combination of low prices and low interest rates. If interest rates rise a little, it is a sign that future raises are coming, so then it would probably be the best time to buy a house. Or more accurately the day before interest rates rise is the best day to buy a house, with the day after being the 2nd best time to buy a house, and further down the road with higher and higher interest rates being worse and worse times to buy.

 

[Paulie]

Actually, I think that, as counterintuitive as it may seem, because economic trends are based as much on psychology as actual economic theory, that a small rise in rates would create a sense that the housing market is recovering, thus cause more people to move back into the market.

I like the point that you are making here, but it would not remedy any of the real problems that are occurring in the housing and job markets. Not to mention the fact that the market would not be happy with the fed for increasing rates.

If the fed raised rates tomorrow would you go out and buy a house? I think you are underestimating todays homebuyers. Everybody is going to wait this one out until they are certain that the bottom has been reached. Problem is the housing market is still being propped up, so we won't see the bottom for some time to come.

Yes it would make me go out and buy a house. What I am trying to do is get the best combination of low prices and low interest rates. If interest rates rise a little, it is a sign that future raises are coming, so then it would probably be the best time to buy a house. Or more accurately the day before interest rates rise is the best day to buy a house, with the day after being the 2nd best time to buy a house, and further down the road with higher and higher interest rates being worse and worse times to buy.

There's a definite possibility that higher interest rates would force prices down. Whether or not the reduction in price would be equal to or greater than the increase in total interest paid on principle is another story.

 

[Middleoftheroad]

I like the point that you are making here, but it would not remedy any of the real problems that are occurring in the housing and job markets. Not to mention the fact that the market would not be happy with the fed for increasing rates.

If the fed raised rates tomorrow would you go out and buy a house? I think you are underestimating todays homebuyers. Everybody is going to wait this one out until they are certain that the bottom has been reached. Problem is the housing market is still being propped up, so we won't see the bottom for some time to come.

Yes it would make me go out and buy a house. What I am trying to do is get the best combination of low prices and low interest rates. If interest rates rise a little, it is a sign that future raises are coming, so then it would probably be the best time to buy a house. Or more accurately the day before interest rates rise is the best day to buy a house, with the day after being the 2nd best time to buy a house, and further down the road with higher and higher interest rates being worse and worse times to buy.

There's a definite possibility that higher interest rates would force prices down. Whether or not the reduction in price would be equal to or greater than the increase in total interest paid on principle is another story.

While this truly is possible, my goal isn't to try and hit the exact bottom, because I will just guess wrong. My goal is just to be sure that I am near the bottom. To be positive that I am near the bottom, I will have to miss it and be a little too late.

 

[ThinkCritically]

What about all the bad mortgage backed securities that the FED is still holding on to. Aren't they just propping up the housing market still, and if so we haven't seen the bottom yet.

 

[Jos]

Yes it would make me go out and buy a house. What I am trying to do is get the best combination of low prices and low interest rates. If interest rates rise a little, it is a sign that future raises are coming, so then it would probably be the best time to buy a house. Or more accurately the day before interest rates rise is the best day to buy a house, with the day after being the 2nd best time to buy a house, and further down the road with higher and higher interest rates being worse and worse times to buy.

There's a definite possibility that higher interest rates would force prices down. Whether or not the reduction in price would be equal to or greater than the increase in total interest paid on principle is another story.

While this truly is possible, my goal isn't to try and hit the exact bottom, because I will just guess wrong. My goal is just to be sure that I am near the bottom. To be positive that I am near the bottom, I will have to miss it and be a little too late.

Or a little early?

 

[Middleoftheroad]

There's a definite possibility that higher interest rates would force prices down. Whether or not the reduction in price would be equal to or greater than the increase in total interest paid on principle is another story.

While this truly is possible, my goal isn't to try and hit the exact bottom, because I will just guess wrong. My goal is just to be sure that I am near the bottom. To be positive that I am near the bottom, I will have to miss it and be a little too late.

Or a little early?

Being a little early requires guess work, I'm not going to guess and be wrong. I'm literally waiting to go "damn I should have bought a house two months ago". That way I know that I'm still near the bottom. When it comes to major investments like a house, I wont be guessing.