20 years ago, back in 1992, a 30-year mortgage here in the U.S. was running at around a 9% interest rate. 10 years ago, back in 2002, this same type of mortgage was generally around a 6.5% rate. A quick look at a mortgage calculator can tell you what kind of impact a big drop in interest rates can have on one’s mortgage payment. Keeping that in mind, it’s quite interesting how low today’s interest rates are.
A quick check I did, as of this writing, showed 30-year loans having interest rates of under 4%. Consider the comparison of approximate rates across time:
1992: 9.0%
2002: 6.5%
2012: 4.0%
Clearly, while there were some ups and downs between those years, it’s clear that 30 year mortgage rates at historical lows is basically the current situation. If you want to buy a home, and need to borrow some money in order to do so (like most people), this appears to be a time to get a loan at a very low rates compared to recent times.
This gets me thinking, though, about the direction home prices have been going: down. Of course, no two real estate markets are exactly alike, but I’ve taken a look around what’s probably a fairly typical market: my local one here in suburban Chicago. What I’ve noticed over the last few years is that prices have continued to slide on a regular basis. Now, the declines may not be as steep as what might have been seen in many other areas, such as certain parts of Florida, Nevada, Arizona, and other locales. However, I’d say that in the last 5 years, prices seem to have dropped 25%. That’s just a ballpark estimate based on my own observations, and the actual figure might be different – but you get the idea: home prices have declined.
What’s interesting is that despite interest rates trending lower, home values continue to slide in some places.
What is this telling us about the economy, and where we are today versus the past? It makes you wonder when the market will truly stabilize, and what it will take for housing prices to stop falling and perhaps go back to the old patterns of slow but very steady increases? Not gains like we saw in the housing bubble days, but at least holding value as we saw in pre-bubble days.
What’s interesting to me is that while we are getting more “mobile” in terms of technology, but less mobile in terms of being able to move as easily.
My Questions for You
How has the housing market been in your area?
Do you think it’s a bigger issue that despite interest rates being so low, many housing markets continue to show declining prices?
How long do you think it will be before the housing market here in the U.S. will straighten out?
I can’t believe anyone bought houses at 9%. That’s shocking.
I live in Vancouver, BC where home prices are insanely high and haven’t crashed yet. THey have to one day, but offshore investors snap some properties up so they’ll stay high I suppose.
Daisy – Vancouver has a lot to offer. As a visitor of the city a couple of times, I see the appeal. Of course, prices can’t go up indefinitely, can they?
I bought my condo in 1999 with a 6.875% rate and thought nothing of it, that was just normal at the time.
I think the correlation between interest rates and prices is loose right now. I believe that any price declines that have happened over the last 24 months have to do with foreclosures and people walking away, things that cause a cycle of falling prices. The market WILL stabilize once people stop walking away from underwater mortgages. Eventually simply paying the monthly payments will build up equity to where people will start to get closer to zero, and you’ll see less and less of it. Once this happens, prices will return to a positive trend.
MB – those rates of around 6.875% were probably considered pretty good by many. You would think that the market would stabilize at some point, but I wonder how long this effect will really last.
It has been, and still is, a fantastic time to buy, that’s for sure. The housing market in north texas is probably more stable than most but we’ve still seen a LOT of foreclosures driving down prices. I’d love to buy more properties in some neighborhoods but it’s hard to find non-distressed sales to use as comparables.
Dollar D – true that foreclosures are driving down prices. It makes people think, why pay a higher price when you can get a home at a rock bottom, “bargain” price. Will be interesting to see how long it takes for prices to truly bottom out.
It gets worse before it gets better that’s the story of every bubble. The recovery is always painful.
MC – that seems to be the case with bubbles! And real estate sure turned out to be one, in most areas here in the US.
I’m a real estate junkie. I love following the houses in our neighbhorhood. We bought our current house in early 2005. It has now lost about 17% (1/6) of it’s value from when we bought, and about a full 1/3 of it’s vaule from the height of our market in 2007.
However, if our house were north of Seattle instead of south, it would be worth at minimum what it was at the height of the market. It’s really funny how about 10 miles can change the value of a home.
I know of a lot of people who have been able to cash in on the historic low interest rates. I wish we were one of them, but we’re stuck at a 6% APR with an LTV of over 100%, and no chance of refinancing without paying PMI. (Our mortgage states that our lender can never sell it, meaning it can never be bought by Fannie/Freddie, and therefore we are not eligible for HARP.)
I guess this year I saw that PMI was now deductible on income taxes where it wasn’t before, but we currently don’t see a value in trading our interest rate for PMI.
Shanendoah – it really is interesting how prices can be impacted differently depending on the area. Some areas were hit harder than others, while others seemed to hold value. Around here, it seems like more outlying areas – including “exurbs” – didn’t fare as well. Meanwhile, some closer to the city locales haven’t appeared to be hit as bad? Just my perception. Like the saying goes – location, location, location.
We would be buying a home sometime soon if it weren’t for the fact that we bought at the height of the bubble back in 2006. Since then our home has dropped by about 30% in value, and we’re a bit underwater now, or slightly above water – depending on what you think we could sell our home for. The values in our area are hard to come up with because there have been a bunch of foreclosures dragging values down – and until the market clears those homes out, values will be pretty low I think.
Peter – that’s the thing, there are many people that haven’t lost their homes, but have seen their equity dry up. It makes it less appealing to pick up and move, right? I wonder how liquid residential real estate will be for a while.
Housing prices in my area (Phoenix) have fallen 62%. Insane! My house was “worth” $350,000 in early 2006. Now it would sell for about $135,000. When they started to fall I thought the prices might get into the high $200,000s. haha. If I had known how far they would fall I would have cried.
It does seem to be getting better though. The investors are out in full force buying houses for cash. It’s actually hard to buy a house right now if you are financing because as soon as a house hits the market there are cash offers on it.
Ashley – that’s a staggering drop in market values. I have read things about the Phoenix area having huge price declines in recent years, along with Las Vegas and Miami. Interesting how investors are scooping up homes as you say.
It’s funny about the burbs, since building in the city started picking up this past summer. But Chicago can only build upwards.
Home sales have been rising over the past few months. Inventories are at the lowest point since 2005. If the housing market hasn’t turned around already, it will before the year is up. If the government goes through with the foreclosure auctions, it will only drop inventory levels faster.
JP – we shall see what happens, it should be interesting. You might be more optimistic about the speed of market progress than me:)
It really comes down to supply and demand. In our area, the supply has kept prices in check. Businesses and jobs leaving caused many foreclosures in the early 2000s. About 1 in 20 houses were empty in some neighborhoods. But builders kept building. I read an article in 2005 that locally enough houses had been built for population growth of 250,000 but only 80,000 was needed and most of that was new births.
I recently read an article where one economist suggested we had enough housing stock to last for the next 30 years as a result of the bubble and over building. That could be a long recovery. Simply supply and demand.
cashflowmantra – those are some staggering figures: housing for growth of 250,000, but only 80,000 needed? This speaks to a different problem from that of foreclosures.
We bought in 2008, which we probably should have waited, but our circumstances left us with needing to buy at that time (military) We were lucky enough though to have bought in an area that was relatively stable. We did refinance a year into it too.
Niki – sometimes we have to yield to circumstances, life happens. Glad you bought in an area that was stable, that’s good!
Barb – I wonder if rates increases will cause prices to drop, despite foreclosures/short sales moving out of the system?
That was an interesting article. Makes the case for continued price pressures, and flies in the face of those expecting an imminent turnaround. Given that low interest rates haven’t spurred home sales, it’s not the best sign.
The housing market has been pretty good in Denver. I became a first time home owner in September to take advantage of the good prices and rates and the timing was right for me.
Congrats, Eric!