Housing bottom? You’ve got to be kidding

With all the divination of the graphical tea leaves going on—are we at a bottom, or bouncing along the bottom, or will we go lower?  gasp!—it is worth remembering that houses are bought “on time,” and that most people buy all the house they can (even if they have to put down 20 percent)—and that interest rates are currently at historical lows, so that a further decline is just about baked in, especially given current price weakness.

If mortgage rates rise from 4 percent to 6 percent, the payment on a 30-year mortgage goes up 25 percent.  People aren’t going to be able to afford the same price house.  Here are empirical results for the Case-Shiller 10 City and US indices showing the inverse relationship between house prices and interest rates very clearly:

Add to this problem—and interest rates will go up again sometime, and if they go up in a galloping inflation we will see a complete collapse of the housing market, as banks and their regulators will not permit another bubble to form quickly—although one will form even with 20 percent down given enough time—and because interest rates will rise more quickly than house prices, and because people are becoming just as afraid of the housing market as they are of the stock market.

You say we’re near a housing bottom?  You’ve got to be kidding!