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On 06 Sep 2003 14:59:36 GMT, (Gould 0738) wrote:

That's not an acceptable answer even if it does happen to be true. In
politics it ALWAYS has to be someone's fault, and it's ALWAYS the
other guy. If the economy is really so bad, I'd like to know who
these people are bidding up the price of housing to stratospheric
levels.

The Federal Reserve.

The Federal Reserve (Big Al and his boys) has very little to do with mortgage
rates.

Home buyers are the ultimate "payment buyer." The percentage of folks writing
out a check for $468,900 to move into a rickey-tickey cul-de-sac clone 40 miles
from town in "New Westchester Estates" (or some other pretentiously named
community) is likely to be in the low single digits. Even if you can afford to
pay cash for housing, the interest rates make it more atractive to borrow.

Housing prices are no more logical than were the prices of stocks in 1999.
"It's worth it because that's what the last guy paid for the same offering, and
it's going up in value so fast we have to buy now or we'll never afford it
again!"

While declining interest rates have allowed payment buyers to pay some very
high prices for housing of late, those same interest rates cannot continue to
fall.

Rates actually have risen from their 45 year low reached on June 13 of this
year. 30 year fixed rate mortgages moved rapidly from around 5.25% to around
6.25%. Rates don't need to fall in order for a housing market to survive.

My wife recently mentioned to me that the overnight Fed Funds rate is
hovering around 1 percent.

The Federal Funds rate is exactly 1 percent--and there is room for the Federal
Open Market Committee to drop it right to zero if they wish. They may well do
just that--although they've already demonstrated caution over the years.

That has to be about the bottom, unless investors
are going to be willing to pay to have their money stored for them. :-)

The Federal Funds rate is not investor money.

When those interest rates start to rise, as they will to cover the cost of the
Iraq invasion and attract investors to cover our
record national debt, housing prices could be a short-term victim. People might
want to move to a newer, nicer, house but if stepping up $100k in mortgage
balance at a higher interest rate changes that just barely doable $2500 a month
mortgage note to $4100, a lot of people will decide to

The rate on the 30 year fixed rate mortgage has just risen one full percentage
point--a tad more, actually--but that's a function of the selloff in Treasury
bonds that began in mid-June. This is important because a) the selloff reduced
the price of the "long bond" and price and yield move in opposite directions;
and b) mortgage rates are set by the investors (like Fannie Mae) based on the
yield of the long bonds.

But let's look at your example above. Someone contemplates moving up to a
larger/fancier/nicer home with a mortgage balance $100,000 higher than what they
now have, with a payment of $2,500 (principal and interest) before some
escalation of interest rate. Using today's rates--about 6.25% for a 30 year
fixed rate mortgage--their $2,500 payment would apply to a mortgage of $406,000.
In order for their payment to go to $4,100, as you have suggested, the mortgage
rate would have to increase to 11.75%.

Do you believe this is a likely scenario? If you do, why?

"stay put" instead. At that time, those who
*must* sell will have no choice except to dump the price as low as they can
manage to go, and that will bring the price of all similar houses down as well.

The fact is (at least here in Northern California) that there has been a certain
amount of "dumping" of high-end houses. This is arguably attributable to the
end of the "Dot-Com Goldrush," where many dot-com scamm...uh, entrepreneurs saw
their assets evaporate as their companies imploded and stock options became
worthless. They had bought extravagant homes at inflated prices and, needing to
dump them, got whatever they could--at the true market value. For most of the
housing market, however (resale and new) prices have continued to increase at
some increment over the inflation rate.

Higher end houses in areas with a lot of unemployment have not appreciated at
all, and have declined in supposed "value" in many cases. Seattle is a good
example.
Our own place is a humble little tarpaper shack, of course, but our run down
dump is surrounded (by outraged neighbors) in one of the priciest districts in
town. We couldn't afford to buy even our meager little hut if we moved to
Seattle today, but we have lived at our present address about ten years.

As the dot.com boom roared on, housing prices in our neighborhood of 100-year
old
wood frame houses blew clear up into the seven digit category. We were shocked
when prices crept up to this level, but the houses sold fairly quickly and in
many cases before there was an advertised reduction in the listing price.

Some of those "Million dollar" houses have since resold. The one on a corner a
block away started at $1.1mm, dropped to $950k, dropped to 895, 875, 845, 825,
and finally $795k before the "SOLD" sign went up. $795k was less than we
remember the house advertised for when it last sold- so it's likely the latest
reseller sacrificed some of his initial down payment just to get rid of the
house at this point....and of course just forget any "appreciation."
Some houses in the neighborhood have started extremely high, dropped a few
steps, and then been withdrawn from sale.

A seller's asking price may bear little relation to its actual value, as
determined by the amount a ready, willing and able buyer is willing to pay.

Low end houses (meaning in the low six-figure category in W. Wash) have held
their own and shown some appreciation in this region, but there is a lesson to
be learned from the decline in prices for the
highest priced homes....the price of a house is not supportable unless it is
affordable to enough buyers to create competitive demand.

When the mortgage rates rise much faster than wages, something has to give way.
Price is usually that something.
Remember that when 5% mortgages go to 6%, the interest rate has gone up only 1%
but the cost of money has increased by a factor of 20%....(6 being a number
120% as large as 5).

Um...it doesn't work that way. Using your example, a 5% mortgage (and that was
a rate that was available as a 30 year fixed loan for only a short time) would
have a monthly payment of $1,610 for a $300,000 loan. Raising the rate to 6%
increases the payment to $1,798--a 10% increase. And, when looking at the
actual cost of housing, you have to take into account property taxes and
insurance. Here in California, the property tax on a $400,000 property would be
about $400 per month. Insurance would add about another $75 monthly--so the
total payment in the first case would be $2,085. In the higher rate scenario,
it would be $2,273--an increase of around 8%.

With workers having to strike to get 2, 3, or 4% annual
raises these days, (and many others willing to forego any sort of raise and
just grateful to be working at all) an overnight 20% increase in the cost of
*anything* will put a damper on demand for that item.

In order to qualify for ("afford") a property with a $300,000 loan, a borrower
would have to show an income of around $5,200 per month (assuming his consumer
debt was modest). At the higher rate, he'd need $5,680 to qualify in the same
way. Looking at it from the other side--and assuming he would not move to any
sort of adjustable rate mortgage--the run-up in rates would mean that he'd
qualify for a loan of $270,000. If he were moving up from another house, he'd
have to choose between applying more of his sale proceeds to down payment and
buying a house for $30,000 less.

OB. BOAT CONTENT

A good friend of mine called me yesterday, asking me what I know about boat
financing. He had just sold his home in pricey Alameda as part of a divorce,
and was looking at what he could afford to buy in his area. Basically, nada.
So he's contemplating a 36-42 foot trawler at around $150,000 to live aboard.

I'm more than a little jealous!

Joe Parsons
WAY too much coffee this morning