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Mortgage Interest and House Values

2015/05/26 by admin

When markets are at historical extremes it is easy to make a prediction which direction they will go.

At this moment in time interest rates are still roughly in the range of all time lows. This makes it a sure bet that over time they will go up. There are only a very few places down they can go, and an infinite number of places they can go up.

Housing prices are not so easy to predict.

Two years ago, when the market bottomed out, it was very easy to predict prices would go up.

Now we are close to pre housing market crash levels.

When I look at long term housing price trends, current prices seem average.

Over the past 100 years, prices of property in California have tended to trend upward at a rate of about 8% a year.

This number changes from decade to decade, but that has generally been the rule.

Prices now sit just about on that line.

Housing prices are also up now about 20% to 50% from the market bottom about 6 years ago. That last sentence is what really strikes me. Let’s assume for a moment that the market correction took prices to their correct level. Then in 6 years that correct level appreciated 5% a year which is conservative compared to historical increases. That would be a roughly 34% increase expected as an absolute minimum.

If you assume 8%, then we would have expected to see an 85% improvement in housing prices.

Population has not decreased.

The demand for property in coastal southern california has not decreased.

The only factor that I think is keeping the prices down, and might drop them at all might be the interest rates.

Let me explain.

A typical home these days costs about $600,000.

Payments on that, even with a good sized down-payment, ends up costing about $2500 a month, after you figure tax deductions, HOA’s, property tax etc.

That is about as much as the average family can afford.

The problem may turn out to be the interest rates.

If interest rates go up, then this same family will not be able to afford this house.

So the housing prices will have to come down for the house to sell.

Or here is one other alternative, that I think is most likely to happen.

The government does not want to see housing prices drop.

When that happens, people tend to lose their homes, mortgages default, and banks to under etc.

I think interest rates will go up.

At the same time, the government will add a lot of money to our money supply.

We will get some inflation.

People will have higher pay.

Housing prices will stay even or climb slightly.

People will pay more on their monthly payment, but they will also be making more money.

It will appear that housing prices stayed the same, or even went up.

In reality, because a dollar is worth less, the real price of the homes will have actually dropped a bit, but no one will notice.

Then at some point housing prices will climb and climb, and then guess what? That’s right, they will drop again.

Over and over again for the rest of eternity :)

 


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