Ben Bernanke, chairman of the federal reserve, has pledged to keep interest rates low through 2015 to instill investor confidence. However, there is dissention at the federal reserve, and Bernanke will likely not be reappointed in 2014 at the end of his term, so federal reserve policy could change. Further, the federal reserve does not have absolute control over interest rates, and if investors want to exit government bonds in mass, interest rates may rise (bond prices fall) even with the federal reserve buying all the bonds it can. But how likely is that scenario? Bernanke would like you to [Read More...]

Economists who focus on larger trends, the so-called macro-economists, have rightly pointed out that housing markets in the past haven’t been very sensitive to fluctuations in interest rates. For example, during the 1970s, interest rates rose significantly, which should have caused house prices to drop, but instead California inflated a housing bubble. During the crash from the bubble in the 1990s, interest rates declined, and so did prices. The same has been true of the Great Housing Bubble. With these significant periods when mortgage interest rates did not impact house prices the way the math would suggest, why would the [Read More...]

HELOCs are making a comeback. Banks are offering those willing to become loanowners free money at very low rates, so borrowers are taking the money. Last time around, this was an open invitation to theft as borrowers extracted over a trillion dollars in mortgage equity withdrawal which they didn’t pay back. For now, banks are being more conservative in their lending, but since lenders will become more aggressive as they become more confident in rising house prices, there is a risk that rampant HELOC abuse may return. If it does, it could easily reignite the same desires that inflated the [Read More...]

When I first began writing about the housing bubble in early 2007, I believed prices would crash because the cost of ownership using conventional financing far exceeded people’s ability to pay. I predicted prices would fall about 40% as rents and incomes increased and prices went down. I originally predicted a bottom around $425,000 in 2012 (see below). Assuming prices have bottomed, the lowest tick was $470,000 in March of 2012. The nominal price decline was not as bad as I predicted staying about 10% above my predicted number. However, my reasoning was based on the total cost of ownership, [Read More...]