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Moneycontrol.com >> Message Board >> View Messages >> Rel Ind Infra
   You are here :     Moneycontrol     MMB    Stocks      Rel Ind Infra                         Most active discussions of 2006 , 2007 & 2008
The domino effect of rising interest rate (1)   06-Jul-08 19:03Tracked by (0)  
Posted by:   Bhatt on ( 06-Jul-08 19:03 )
Price : BSE: Rs 767.15 ( 4.20 % ), NSE: Rs. 759.75 ( 4.38 % )
The domino effect of rising interest rates
The first thing that will happen in this country when interest rates go up, as they eventually will, is that a huge percentage of homeowners won't be able to make the payments on their home. Their credit card payments are due, and those are higher, too (thanks to higher interest rates). Then their house payment comes due. They were paying $500 a month. Now they have to pay $1,000 a month because interest rates are 12 percent. What happens? They can't make the payment. What do they do? They sell the house, or they try to hang in there for a while until the house gets repossessed, and the bank sells it. Either way, the house is getting sold. The house then goes on the market, adding to the supply glut of homes for sale. It's not just this one family that's affected, because interest rates affect everyone. Suddenly, a large group of homeowners can't make the payments all at once.
So, what happens to the price of houses when, say, a mere 4 percent of all homeowners suddenly decide to sell their homes at the same time? Prices plummet, and they plummet so fast that all the people who own homes can't sell them quickly enough. The condo you paid $100,000 for is only worth $80,000, and then it's only worth $70,000, and then it's only worth $60,000, and it continues to drop. Your condo ends up being worth only half of what you paid. Now you owe $90,000 because you didn't sell it yet. You owe $90,000 on a condo that's only worth $50,000 because the housing market popped. The bubble burst.

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