Prices fall, especially in markets with high home prices. People can only afford a certain payment amount per month. Say your family can afford $2,000 a month in California. Today that's enough to make the payments on a $475,000 loan. If interests rates were to go up to 10% or above like they did in the early 1980's, $2,000 per month could only make the payments on a $227,500 loan.
In other words, you've cut the purchasing power of 90%+ of the homebuying population in half. There won't be anybody to pay your million-dollar asking price. You'll either have to cut your price in half or decline to sell your house.
It will also pop the US debt economy. So many people live it up by taking out second mortgages or refinancing their homes to leverage equity, but when they have no equity they can't do it. Even if they kept their equity they could only afford the payments on half of what they could afford before. So, even in an optimistic scenario, consumer spending is drastically reduced.
The GOOD thing about high interest rates is that it encourages people to save. People would earn $80 a month in interest for every $10,000 in savings.
The FED will never raise interest rates to 1% let alone 10%
Yeah, at this point, the Fed is all talk. The markets are tanking right now at even the suggestion of rate hikes and tapering.
Yeah, that's the thing. We can have huge inflation but interest rates at 1%. It's highway robbery.
It's about the imminent impending bankruptcy I think because of sent servicing. Increase in interest rate will finally bankrupt the usa
They're fucked, though. If they don't raise interest rates inflation will consume their profits. All the outstanding debt owed them by mortgage holders, student loan borrowers, etc. is priced at rates far lower than inflation. That means you actually make money by borrowing because you're locking in the value of that money to the time when you borrowed it. The lender is losing buckets of money.
On the other hand, increasing interest rates will tank the real estate bubble and put us right back in 2008. Good luck Mr. Fed.
Right. So, if you're looking to buy, you wait for prices to fall & the suckers to walk on their upside down McMansions?
Unless you have cash you're not in any better position. Sure, the purchase price is lower but the savings all go to the bank in the form of interest. Your payments are the same for either price. You will also have to wait longer to enjoy some equity because interest rates will be weighing down housing prices. At 10% interest real estate prices have to increase at more than 10% just for you to break even when you sell your house.
Yes, in this scenario you can assume cash flush waiting to pounce.
Of course you're in a better position. The fed will eventually have to lower rates then you refi with a smaller payment, then wait for prices to rise again because interest is lower.
2010 was a good year for people looking to buy foreclosures.
Didn't have Trillions in free Fed Bux to Blackrock and other institutional in 2010, though.
So, even in an optimistic scenario, consumer spending is drastically reduced.
Which is exactly what is needed. Less consumption, more money in the bank available to be loaned to businesses to generate real long-term wealth from it.
People would earn $80 a month in interest for every $10,000 in savings.
Fuuuuck that would be nice.
At the same time the value of your savings would be decreasing even more by inflation. Only when interest rates > inflation do you win by saving. The Fed will NEVER allow that to happen for long because they don't want you savings. They want to drive you to invest in commodities so they can collect all those investment fees on your money, not to mention inflate stock bubbles so they can cash in. If private people could beat inflation and earn a little just by saving money a lot of people wouldn't be in stocks and bonds.
Banks don't loan money like that. When they loan they create that "money" on their books, doesn't matter what they actually have it reserve . Reserve requirements effectively don't even matter as they can loan from fed at end of day to balance books when needed
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