Rising interest rates / housing market scares me

[DeathDonkey]

I am still fairly new to the world of investing, but I am trying to educate myself, and recently in this forum as well as some wise blogs that have been linked to, almost everyone says that the US economy has severe problems.

If I understand the issue clearly (which I'm sure I don't) the rising interest rates and overpriced housing market simply cannot coexist. It so happens I am in the process of buying my very first home, a condo in San Diego near the ocean (not cheap!). Reading about a collapsing housing market, and rising interest rates (I am getting a 5/1 ARM so that affects me too) is terrifying to someone making such a large purchase for the first time!

I think I understand the problem but nobody seems to be saying what to do about it. I need a place to live, so even if the housing market crashes, I'm still going to have to make my monthly payment instead of selling, of course even if I wanted to sell during a crashing housing market I wouldn't find a buyer. Is the worst-case scenario for me that I will owe more than the house will be worth? In theory if I ride out such a crash and can make my monthly payments, eventually things will change again and over the longterm, the investment might make me money? (that's probably too vague to be answerable)

Separately, if that scenario did take place, what types of investments would become better? I would assume international stocks? Gold?

Thank you in advance for any insight,
DeathDonkey

[LinusKS]

Yeah. If interest rates go up (likely), and the housing market goes down (or crashes), you'll likely be upside down. If you decide to move anyway, you can send your keys to the bank, or come up with more $$$ to pay off the buyer. Either way your down payment is gone.

If you can afford it, you like the place, and you think you're going to be there a while, buy it anyway. Like you said, you've got to live somewhere.

But if you can rent something similar for less, consider renting instead. If rents are much cheaper than mortgage in your neighborhood, it's a sign the market's overpriced.


As far as what investments are better - you've got me. My theory is there's just too much capital floating around. The rich just keep getting richer, and they've got to find somewhere to stash their cash. Meanwhile, the US keeps running trade and budget deficits. The dollar ought to be swimming under water, but much of the world economy is denominated in dollars. Plus, the Japanese, and especially the Chinese, keep financing everything.

The net effect is tons of currency - capital - that can't find a home. First it schooled in the stock market, and when that finally crashed it started creating a housing bubble instead.

So ordinary working people can't find a home, and the moneyed class creates massive artificial wealth, leveraged through the banking system.

How long can it all last?

Who knows. I thought the stock market was going to crash years before it did. If I'd had any money back then I'd have lost tons.

As far as where to invest - it's hard to find a decent place to put capital in an economy where there's too much capital chasing too few assets.

[Brainwalter]

In my estimation excess currency is fr diferent from excess capital. What you described is IMO an excess of currency/liquidity chasing a SHORTAGE of real capital.

[LinusKS]

Hmm. Yeah I may have my terms mixed up. What I mean is too much money chasing too few assets.

I tend to think of capital = money. But maybe that's wrong.

[chardog]

[ QUOTE ]
Reading about a collapsing housing market, and rising interest rates (I am getting a 5/1 ARM so that affects me too) is terrifying to someone making such a large purchase for the first time!

[/ QUOTE ]

There seems to be a conflict here. How can you be terrified of rising interest rates and the resulting effects on the housing market yet elect to take on an adjustable rate mortgage? If the answer is "that's the only way I can afford the mortgage payments" then I think you need to give more thought to this contradiction.

[ QUOTE ]
Is the worst-case scenario for me that I will owe more than the house will be worth?

[/ QUOTE ]

As you stated in your post, the worst case scenario will be you failing to make your monthly payments and a foreclosure.

[DeathDonkey]

[ QUOTE ]
How can you be terrified of rising interest rates and the resulting effects on the housing market yet elect to take on an adjustable rate mortgage? If the answer is "that's the only way I can afford the mortgage payments" then I think you need to give more thought to this contradiction.

[/ QUOTE ]

The answer is a lack of education on my part. Having never done this before, thinking more than 5 years down the road at the possible consequences of an adjustable mortgage seems like forever away.

Detruncate: Thank you for your kind words, your post makes me feel better. I do view a house as an investment opportunity, though. I am the type of person who could be happy anywhere but my goal is to makey monetary decisions that will allow me to have choices in my life, so I don't want to screw this up too badly [img]/images/graemlins/smile.gif[/img]

-DeathDonkey

[DesertCat]

Have you done the math on renting vs. buying? My guess is you should rent for a year or two, and see what happens to prices. My guess is the risk of higher prices over the next two years is almost nil.

[LinusKS]

Why do you say the real estate market is going down, DesertCat?

[DesertCat]

[ QUOTE ]
Why do you say the real estate market is going down, DesertCat?

[/ QUOTE ]

Interest rates. Higher rates make RE less valuable, declining rates make it more valuable. Twenty years of declining rates have made people think appreciation can be 10%+ forever, and it can't (because after another 20 years no-one could afford a house).

I think rate increases will give us flat prices for a few years until prices get back into line with historic appreciation levels.

[chardog]

DeathDonkey:

It's good that you are thinking hard about this important decision. Two things you didn't mention in your OP that you should be thinking about and might help in the discussion:

o How long do you plan to stay in the condo? What might possibly change this (ie marriage, family)?
o What is your job situation/outlook? Do you have good visibility on what your income/job-security will be over time?

I agree with other's that you should not think of your house as an investment per se. I believe that generally housing appreciates near the rate of inflation and you should consider any return above that rate as "gravy".