Interest rates are going back up and when rates go from 5% to 7%, that’s a 40% increase in the amount of interest a buyer has to pay. Therefore, house prices must drop proportionately to compensate.
House prices in the US are falling good and fast and according to a report from the Office of Federal Housing Enterprise Oversight (OFHEO), US house prices grew at the slowest rate in thirty years in the second quarter.
High rates of house price appreciation in recent years have spurred increased construction and coupled with slower sales, this has led to higher inventories of unsold homes. This provides further evidence of a cooling US housing market which is now likely to constrain further appreciation rates.
Home prices were 10 % higher in the second quarter of 2006 than they were one year earlier, but up only 1.17 % versus the first quarter.
This was the lowest quarterly rate of growth since the fourth quarter of 1999 and the sharpest deceleration in house price appreciation since the beginning of the OFHEO’s index in 1975.
James Lockhart, OFHEO director, said: “These data are a strong indication that the housing market is cooling in a very significant way. Indeed deceleration appears in almost every region in the country.”
Tax cuts are also to blame for the recent drop. At least 10 states have cut property taxes this year or are preparing to do so. This is part of a tax mini-rebellion that has been brewing alongside higher home prices.
Economists generally like the property tax because it is stable. “The property tax is a fantastic tax for things that are purely local because, under those circumstances, it does not function like a tax. It’s more like a user fee,” says Harvard University economist Caroline Hoxby.
So is this bad news for investors? Real estate related businesses say it isn’t. Basically because they don’t make money if buyers do not buy. It certainly does make for a good advert in the window for those wishing to enter the property market…just don’t expect a fast return. These businesses have a large financial interest in misleading the public about the foolishness of buying a house now.
So what should you do? If you own a house, consider selling and do so quickly is what economists are saying. That way you can actually keep some of that money that appeared so seemingly easy. Otherwise, it will be painful to watch it vaporize back into thin air as the drop will continue.
If you do want to buy however, look around and see that house prices are definitely falling. Find a rental, it’s still a promise of seeing your money come back. But on the other hand, why hurry to buy now? Save your cash and buy for much less in the very near future.