Thursday, July 24, 2008

Interest Rates Rise, Housing Death Spiral to Ensue

Due to the problems that housing and lenders have had as of late, interest rates for California home purchases have gone up, way up, in the last couple of months. Have a look at this graph from

It shows that the interest rate for a "typical" home in OC has gone up from about 5.7% to about 6.5% since May. When I run the numbers, this translates into a roughly 9% higher mortgage payment! My guess is that this change alone will cause 10 to 20% of those that could have qualified for a loan in May to now be unable to qualify.

Put another way, the recent run-up in interest rates has reduced the effective demand for homes in OC by 10 to 20%. Now, if we assume that housing prices are unit-elastic, this change in interest rates/demand ought to cause home prices to drop between 10 and 20% more.

Then there's the compounding effects of the price/demand declines. If prices drop, more people will walk from their homes. If more people walk from their homes, then there will be more inventory on the market and if there's more inventory on the market, prices must drop to meet demand.

Not to mention the fact that, banks seeing a greater increase in foreclosures might use the same inscrutable logic as they've used in the last couple of months and raise their rates in response, which leads to fewer people qualifying and so it goes...

It's called a death-spiral friends and neighbors and the banks are bringing on themselves with the help of the White House...but guess what? You, me and all the rest of the American tax payers are going end up paying this particular bill in the form of bailouts and every other manner of Republican Socialism the Bushies can muster.

How much more of this crap are we going to take?


Natal property said...

The interest is major big problem of the world,it create number of problems.

South American property said...

Those persons who are involved in interest at the end it may of real estate or any other they will bear loss.

Bucharest property said...

The owner of houses who bought their houses through interest most of them are not satisfied.

Bahia apartments said...


I think interest is not good in Islam because interest is unlawful.

Properties in Brazil said...


I think interest will be not allowed in muslim countries.

Uruguay investment said...


I think interest is a big problem in the real estate field.

brett said...

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pjeary said...

This sounds really interesting. I haven’t heard about anything like this previously. I have huge interest in real estate. Thanks

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