How important is 8%?
According to Greg McBride, a CFA at Bankrate.com, "Most economists and housing experts repeatedly cite 8% as the mortgage rate tipping point, one that could trigger a widespread drop in home prices. Rates are currently near 6%."
There's no getting around it, when interest rates rise... your buying power falls. And lowered buying power always leads to falling housing prices.
The Danger of "Reverse Leverage"
Imagine you buy a $400,000 home and put $20,000 down. If the value of your home rises 10%, you'll make $40,000 on a $20,000 investment...a triple!
But what if your house falls by 10%?
One of the biggest concerns about the housing market is that new home construction is hitting record highs at the same time that new home sales have dropped close to 20-month lows. This means there is an oversupply of new homes and not enough people buying.
In January 2005, the inventory-to-sales ratio for new homes increased to 4.7 months... the highest level since 2000. The last time rising interest rates collided with a real estate oversupply was 1990. That year, the price of an average home fell around 10%... and the price of upscale homes declined by 40% to 50%.
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