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Why the US Housing Market Is Likely to Enter a 'Double Dip'
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Why the US Housing Market Is Likely to Enter a 'Double Dip'

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Why the US Housing Market Is Likely to Enter a 'Double Dip'

The steep drop in both new and existing homes sales so far this year makes a strong case that housing is entering the long-feared double-dip.

More on CNBC...

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  #2 (permalink)
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The issues that are never really brought to light or discussed are interest rates and how they effect home prices.

I always tell people, who buy a car, or a home, to be MORE concerned about the interest rate and less concerned about the principal value....because minor changes in the interest rate can have drastic effects on the payment.

To illustrate this fact....take a home that's $325k and apply the currently historical low interest rates to a 30 year fixed.....assuming a 10% downpayment, your payments on a 30year, fixed would be $1525 a month, before insurance and taxes.

Now, let's say that home value drops to $250k, but the interest rate goes up to say 6.5%, your monthly payment has just INCREASED.

This is another reason to expect the eventual drop in real estate value...

Your average family can only afford to allocate so much money out of their income toward housing costs. If they can only afford $1500/month total (say $1100 for mortgage and $400 for taxes, insurance, HOAs, CDD's etc) it's a little arbitrary what portion of the payment goes toward principal and what goes toward interest, all they can afford is $1500 a month.

Residential real estate has been, for a very long time, a very meager investment. Generally, 7% APY isn't all that spectacular, but it was a safer investment than most securities.

We saw MANY of the same things we're experiencing today back in the 70s/80s.

I would tell people, if you're looking to buy a home, to LIVE IN, rather than an investment, now is the best time to buy, regardless of what home values do....because it's interest rates that are the 800 lb gorilla in the room.

And if we see inflation and higher interest rates (like a LOT of people are projecting), the cost of purchasing a home may skyrocket very soon. I cringe when I hear people talk about interest rates in the teens 3 or 4 decades ago.

The counterpoint is obviously that if lock in at a low interest rate now, and your home value drops, (either because of or in combination with rising interest rates), then the drawback is that you're now "stuck" in your home, as your equity negative and it would be much more difficult to get out of it (without harming your credit)....but if you're truly trying to live in it, then that problem simply diminishes...as being stuck in your home only becomes an issue if you have a life changing event (like having 10 more kids or having to move for a new job or something).

The other aspect is that if you believe we're destined for hyper or even increased inflation, the more debt you have the better....it's good to be in debt when inflation is high as it reduces the actual debt.

I say, if you NEED to buy a home now, do it. Don't worry about home values dropping again....cause in a few months/year or two, you could be crying that you didn't when interest rates are back to "normal" or higher.

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