The effect of interest rates on prices

In an earlier post a reader commented on the effect of rising interest rates on prices, and when the bottom would be reached.

"I am curious about increasing interest rates and how they will affect when the bottom is called. How cheap does the house have to be to offset increasing interest rates? "

So I ran a simple scenario.

A $200k loan at 5% interest over 30 years gives a monthly payment of $1074.

If interest rates increase by 1% (a 20% increase) then the same $1074 payment only gets you a $179,134 loan. That's a 10.4% decrease.

So if the bottom of the market is driven by buyers who are buying the max they can afford, and assuming lenders actually go back to the days of the 28/36 rule (PITI no more than 28% of your monthly gross income, total dept no more than 36%) then if interest rates rise 1% it will theoretically drive down prices approximately 10%.

The reader had another comment:

"I remember Portland housing costing as low as $10,000 in the Alberta Arts district. (1990). A nice house in Hawthorne could be had for $60,000 around that time. Of course interest rates were around 21% and no one could afford the payments back then."

I'm pretty sure that 21% interest was back in the early 80's but that's not the point. If interest rates did rise that high again, then that $200k loan suddenly plumments to $61k. That's a scenario nobody wants, not buyers or sellers.

Portland existing home prices up slightly in June - Case Shiller

The latest Case Shiller data was released yesterday, and prices in Portland have ticked up 1% from May to June.

Year over year we're still down 15.2% and we're down 20.4% from the peak.

It looks like the $8k credit might be having an effect, but it's still a bit premature to signal the bottom.

Tune in later for full charts / analysis, but the raw data is available above for the data hounds out there.

Think twice before taking that sink!

A local Damascas man was arrested after stripping his house after losing it to foreclosure (Oregonian). The photo above shows what it looked like before he stripped it. See below for the after shot.

DAMASCUS -- After stripping his foreclosed home of everything from the air conditioning system to the kitchen sink, Grigoriy Bogoslavets was convicted of a crime that is often witnessed but rarely reported.

The 33-year-old electrician pleaded no contest last month to aggravated theft after stealing more than $50,000 of property attached to his former Damascus home, one of the few such cases in Oregon or across the country to result in prosecution. He will be sentenced Sept. 22.

This guy was thorough, he even took the outlets! Seriously, they cost $1.5 at home depot, I'm thinking their street value is pretty much zip. This guy was serious. Unfortunately it's likely to cost him four years in jail.

"Banks, which usually can recoup losses from insurance claims, rarely take the time and effort to report theft of home fixtures. But law enforcement officials say nearby residents, eager to preserve their own home values, are starting to turn in their former neighbors.

That's what happened in the Bogoslavets case. Neighbors tipped off police when they saw Bogoslavets return to his former home with a van after vacating the premises. Investigators discovered Bogoslavets had taken nearly everything he could remove, including the kitchen island, fireplace, bathtubs, the doorbell and electrical outlets."

The morale? If you're losing your house to foreclosure think twice about gutting it, it's just not worth it.

$50k free to buy a foreclosure?

From today's Oregonian:

"If you meet the income guidelines, the government might have a house deal for you. You may be eligible for a $50,000 interest-free loan to help move into a foreclosed home. The program, adopted by Congress last year, is aimed at preventing foreclosed houses from standing empty, bringing down neighborhood livability and property values."

I honestly don't see much downside to this program.

For the buyers you get free money, which you only have to pay back when you sell.

They are limiting it to Bank Owned properties, which limits the buyer's risk (we bought a bank owned home last year, I'll talk more about it soon) and is what I feel the best way to get a good deal on a foreclosure.

This program isn't keeping people in homes they can't afford, it's just helping keep houses from sitting vacant and gives banks an incentive to sell them at realistic prices.

Unfortunately there are only 160 bank owned houses in Multnomah county at the moment, so the pool of available properties is limited. But they are out there.

Oregon breaks top 10... for foreclosures

Oregon now has the 10th highest rate of foreclosures in the nation according to RealtyTrac and CNN, putting us in good company with other states like California, Florida and Nevada.

In July there were 1 foreclosure in Oregon for every 446 households, and a total of 3605 foreclosure events.

Hitting closer to home, one house on our block was sold at auction this past week and the flippers are hard at work fixing it up for resale.

Portland area foreclosures skyrocket in H1 2009

(I believe the second and third headers are switched on the graphic above. The second column is the % of houses in foreclosure, the third column is the rate or 1/xx houses)

In what should be no surprise to anybody here, Portland foreclosures are up 112% in H1 2009 according to the latest Realty Trac data which was released yesterday:

Portland now ranks 60th out of 203 metro areas with 1.31% or 1 out of 76 of all households in some form of foreclosure, a bit higher than the national average of 1.19%.

Las Vegas NV leads the nation with 1 out of every 13 homes in some form of foreclosure.
Seattle is faring better than Portland, ranking 76th with .94% of households in foreclosure.
Salem OR is doing slightly better than Portland, ranking 64th with 1.18% in foreclosure, while the Eugene area is doing much better with only .80% in foreclosure and a ranking of 94th.

While California still holds a number of top spots in the rankings, the rate of foreclosure has declined in most areas. I predict that Portland will climb in the rankings before we fall since we're late to this party and facing higher unemployment than most areas.

Portland neighborhood maps now available

I realized after talking about neighborhoods yesterday that I never added a link to the local Portland neighborhood maps.

When we were first looking for a place to live a few years ago these maps were very handy to help guide where we wanted to live, as these maps are dictated by school disctricts which is what most people with kids are concerned about.

Also, even though Realtors love terms like "Alberta Arts" that isn't a neighborhood, nor is "Hawthorne".

The link will live in the tools section on the right, and feel free to suggest other tools that you find useful.