Surreal Estate: Oh, Those Prices
(MONEY Magazine) – To be a shopper in today's housing market is to suffer a wicked case of mental whiplash, with a little man on one shoulder screaming, "Buy! With interest rates this low, price is no object! Buy! Buy!" and a wee guy on the other imploring, "Don't listen to him--these prices are insane!"
The devil of it is that they'd both be right.
With the housing market moving at such a fast clip for so long, many of us missed its recent jump into hyperspeed. The latest data show that prices nationwide (not just in outliers like New York City and L.A.) grew an annualized 14.7% in the fourth quarter. That hasn't happened since 1979, just before the Federal Reserve began dramatic rate hikes to rein in runaway inflation. The suddenness of the pickup--from 6.3% the previous quarter--is nearly as striking as the number itself and suggests some kind of precipitating event.
But what? No one's sure, though it looks like interest rates gave the public a kind of head fake last year, hitting an apparent low in June, climbing through the summer, then falling to the current lows. That brief glimpse of paradise lost inspired a frenzied rush for 5% mortgages. "It's the last-chance attitude," offers economist David Stiff of Fiserv CSW.
Will prices tumble once rates climb? Few experts see any broad drop; instead, the rate of appreciation would slow. And when local bubbles do pop, the declines tend to be shallow--between 5% and 15%--and last for just three to five years. If you plan to live in a home longer than that, the chance of losing money seems slim.
That's not to say the prospect of the low-interest-rate window closing won't lead people into ill-advised bidding wars or lure them into more house than they can afford. To help prevent that, look to those two little guys on your shoulders, and hear them both out. --SCOTT MEDINTZ