One thing that I believe has been glossed over in the media are the rising mortgage rates. As mortgage rates rise, the affordability of homes goes down. That’s a pretty simple concept. Just how far mortgage rates increase is critical because a 6.5% mortgage versus a 5% mortgage make a dramatic difference in an investors interest in a home as a rental property. The May Case-Shiller number was better than expected even on a seasonally adjusted basis, but home prices are still declining. Since that time, mortgage rates have increased even further and it will be interesting to see if that, combined with coming out of the home-buying season will put further pressure on house prices. Another important thing to consider is this: a lot of the foreclosures are being bought by “investors” who want to rent out the properties until the property value recovers. What happens if those investors are bitten by a further decline in house prices and falling rents? Are those same investors going to come back to the market next year to try it again with 6-7% mortgage rates? Not to mention with 10% unemployment it will be fun to try to collect rents when they run out of unemployment aid.
The fed has done everything in their power to keep long term interest rates low, but it seems that they are losing their grip.
