(no subject)

[which_chick]

Tuesday grocery post.

Old grocery budget: $1525.49
Amount spent: 25.65
New grocery budget: $1499.84

Today at work I was Michaelangelo.



In other news, the Fed raised the Federal Funds rate 25 basis points to 3% for the first time since September, 2001. (That'd be when the WTC collapsed, for folks who have trouble placing events in a timeline. Now, I'm not saying that the WTC thingie caused low interest rates, so don't go around claiming I did say that. I didn't. I'm just trying to give you a feel for how long it's been since we've had halfway decent interest rates.) The statement from the Fed appears to indicate that they're planning to raise rates at a measured rate of increase. In Greenspan-ese, a measured rate of increase appears to mean 25 basis points (a quarter of a percent) per Fed meeting, of which there are eight per year.

Please light a candle in honor of the raise in interest rates.

Over the weekend, when very special friends were enjoying scratch chocolate cake made by my own little hands, I mentioned that rising interest rates would likely cause a drop in the selling prices of real estate. (I'm a fucking hoot at parties.) I got a couple of blank looks and more than two or three Watchoo talkin' 'bout, Willis? looks to boot so probably that was more data than people were really willing to process at a birthday party. Oh, well. It's their fault. They invited me.

Basically, people only make what they make and salaries don't move in lockstep with changing interest rates. People can only afford a given monthly payment and still put food on the table and pay the utility bills... and this payment amount does not change no matter what the fine folks over at the Fed do with interest rates. Also, usually because homebuyers are limited by the 'given monthly payment' thing that I just mentioned, most people (not all, but most) are more interested in the size of the monthly payment than in the actual selling price of the house. (This is equally true for car buyers, and it's one of the reasons that car prices are often presented as $XXX.YY per month instead of $XXXXX.YY sticker price.) Now, if we accept that the selling price of a house is thrown into a 30 year self-amortizing mortgage for most first-time homebuyers, we can run some numbers to see what a beefy interest rate is likely going to do to the price of real estate.

You know, you have to ask yourselves if this sort of crap is better or worse than listening to me bitch about the collards available to me.

Let us assume that Joe Homebuyer can afford a mortgage payment of $2000.00 per month. (Me, personally, I'd have a hell of a time floating that, but let's pretend that Joe Homebuyer makes a fuckload more money than I do. Probably he's got a two-income household with no kids and I daresay he's taking home more than I do. Fucker.) Now, let's use some nifty real-world numbers for, y'know, versimilitude. Over at Bankrate.com, we can see that today a thirty year fixed rate mortgage is running about 5.32%. Okay. Using a handy what's missing calculator, we put in our numbers for payment, interest, and term to find the principal, which comes out to $359,358.49. Wow. You can get a lot of house where I live for 360K. A lot. Eighty acres, a farm, a pond, a barn, and some fenced fields, easy. Damn. If only... Anyway. That's the first half. Note that interest rates right now are pretty fucking close to a forty year low. This isn't how things have always been. This is how things are right now and there is no guarantee that things are going to stay like this. All ya'll considering getting hooked up with a mortgage, now would be a damn good time to lock in some o' that fixed-rate goodness. Seriously.

Now, let's pretend that interest rates for thirty year mortgages go up to 8.5%. (Impossible, you say? Hah. Shows how little you know. Interest rates on 30 year mortgages were that high as recently as 1995, which isn't very damn long ago in the life of a thirty year mortgage. See here for a graph.) What does that do to our Joe Homebuyer's prospects? Well, he's still only affording the 2K per month home, but that home has magically shrunk to having a selling price of $260107.29. Joe Homebuyer, making the same money, has lost about a hundred grand in homebuying ability. You think this is not going to make a difference in the prices of real estate? You think?

Comments

[ladyivy.livejournal.com]

I know darn well this will make a difference in the selling prices of real estate; I work for a bank that does home loans. I must not have been a part of that conversation. The most common complaint we get when people want to do Home Equity loans is that our bank is conservative and appraised their house too low.

Tell me that again in 2 years.