Will Higher Interest Rates Slow the Housing Rebound?

Posted by: Chris Palmeri on June 12, 2009

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Real estate exec Jamie LeFrak disagreed with my blog item earlier this week that declared home prices had hit bottom. His argument? The recent uptick in sales is a “life preserver” tossed to the industry by Washington in the form of low rate, government-insured mortgages.

“Now that the Fed is beginning to lose control of the currency and therefore lose the ability to maintain these artificial rates, you will see a second wave of lower housing pricing,” he says. That’s a shot of his grandfather’s LeFrak City development in Queens by the way.

When will the bottom come? LeFrak says it’s when home prices revert back to their average multiple of 3.3 times the median income of a city or when the typical mortgage payment is 110% of what you’d pay in rent.

“You can expect this second leg down concurrent with interest rate hikes which the futures markets are predicting for no later than November and the bond markets are showing for mid-2010,” LeFrak says.

“The real bottom is somewhere in 2011 or 2012 when everyone (including journalists) is sick of discussing the entire real estate asset class and it has been discredited as an investment. You will also notice this when all the ‘bargain hunters’ are out of the market as well because they can’t afford the cost of mortgage interest to ‘snap up’ the bargains.”

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Reader Comments

Economist E

June 18, 2009 2:12 PM

As a distressed real estate professional with experience during the 90s downturn, I agree with Mr. LeFrak's assessment. Another little known phenomenon is a ballooning shadow inventory of bank-owned foreclosed homes (REOs) that have yet to hit the market. Compounding this is a wave of future foreclosure activity hitting higher credit quality mortgages. Most of the people who are buying real estate now because they believe that this is the bottom are rank amateurs.

Mr. Palmeri, your evidence of a bottom in housing prices was weak, to say the least. You are failing to recognize what the investment community refers to as a "false bottom".

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About

BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.

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