Monday, November 21, 2005

Could Rising Rates Stimulate the Housing Market?

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Here is an interesting article from Amey Stone back in July speculating that a bump in mortgage rates might stimulate the housing market. While I think she was right in a sense as the market was hot a lot of people were not discouraged by early rise in rates, as rates keep going up a lot of the speculative buyers in the market begin to cool down. Many of the economist's were mentioning the disparity in rates towards the actual real estate value of an area when you look at factors such as the cost of apartments in an area. Much of the market was being driven by speculative buying which is not truly the demand of consumers.

Additionally, there is some evidence that the market is beginning to cool down. This post mentions signs that the building of new homes is slowing down and that the rising rates are having an impact. As many economists have mentioned there is a broad disparity between apartment prices and housing prices in a city - a sure sign of a bubble. People will pay a certain premium for real estate, but not beyond a certain point. Its more akin to a tax. People will pay more in taxes to live in California, but they won't be beyond a certain level. Once prices rise too far out of sync it hints that much of the buying is speculative in nature, rather than based on true demand for an area.

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