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Would 7% mortgage rates ‘kill’ the housing market?

Jun 18, 2007

This weekend on a couple different Fox News shows (here's the re-cap of one) I was asked to answer the above question. Rates currently stand in the neighborhood of 6.4 percent, a devastatingly high percentage point above what you could have done a few years ago. And that's on the 30-year rate. For all the Americans who took one flavor or another of adjustable-rate mortgage at rates closer to or below 5 percent, the current rate environment means they won't be able to afford their homes anymore.

The bursting of the housing bubble has been Topic A for at least a year now. Daniel Gross has a clever and informative comparison here of the perennially wrong happy talk about both the housing market and the war in Iraq.

Here's my take on the death of the housing market. If by housing market you mean the boom of the early part of this century, where speculators day-traded homes in hot markets, quickly darting in and out and utilizing fancy mortgages the way stock investors overindulged on margin loans, then yes, that market so over. Stick a fork in it. It's done.

If, however, by housing market you mean the market where average Americans buy homes to live in and sell them periodically when they need to move for a variety of reasons, then no, it's not over. Historical mortgage rates have been north of 8 percent. Many Americans managed to own their own homes at those and higher rates. Expectations have changed in so many ways, of course. Attitudes about debt, for one thing, are completely different now. So sure, people who never could afford their homes except at ultra-low rates they didn't bother locking up are going to be in a world of hurt. But will the old-fashioned housing market continue? I think so. (Share your thoughts with me below.)

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