The Residential Real Estate Crash Index Message Board

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Strategies & Market Trends : The Residential Real Estate Crash Index

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To: MulhollandDrive who wrote (11743)	7/24/2003 11:47:26 PM
From: GraceZ	Read Replies (1) of 306849

granted an automobile is a depreciating asset and hopefully a house will continue to see appreciation, Houses are depreciating assets as well but we've been conditioned by inflation not to see them that way. OTOH land can appreciate and a lot of houses are on land. -g- however, your other point about the marginal areas is also well taken. in other words the loose credit standards designed to help first time homebuyers especially is working to inflate the prices and just may cost them literal thousands of dollars in the near term should rates rise and housing prices correct, hurting the most vulnerable financially the most. This is what bugs me most about the way local governments and federal programs designed to promote home ownership are usually employed. They trot out the low interest down payment loans and grants lower the lending standards in the middle and at the end of a boom (trying to help people buy houses because houses are getting more expensive) but these things are almost no where to be found in the middle of a housing slump when no one wants to buy. All they do is add to the existing price inflation making housing even less affordable to those who want to pay their own way and they insure that the weakest hands will be left holding the bag when the end of the boom comes. If you are going to employ these techniques do it in a way that the person has a vested interest in staying for a long time and do it in places that only need a little shove to turn around. BTW I ran two scenarios through my financial calculator to see if my intuition was correct, that the tax consequences were small over the first five years of a loan when the price changed inverse to the interest rate. If we keep the payment the same as well as term and change interest rates two percentage points, in theory a $100,000 at 8% turns into a $122,385 house at 6%. The person paying the higher rate with a lower cost benefits more in a few respects not the least of which is tax write offs (minimal in the first five years but really make a difference further on). The person paying a lower price is better off even if the rates are higher as long as the change is symmetrical (same house-same payment-same term-different price), which of course it almost never is. What happens is the seller refuses to sell at the new lower price and the buyer winds up buying something of lesser value if they buy at all or they over extend themselves to buy the same house at a higher payment or non-fixed interest rate. First time buyers buy houses for the payments but owners sell them for a cash price. Most people want a higher price for what they own than they would pay if they were buying it so it takes longer for price drops to occur in a rising interest rate environment than it takes for prices to rise in a falling interest rate environment. Unless you have something like a regional bust like we saw in Texas after the oil boom went bust where so many people are in the same biz and they all become unemployed within a short period of time which forces people to sell their houses all at the same time. In a normal pullback people simply stay put longer reducing marginal supply.

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