That, economists say, is the inevitable outcome of the nation’s ballooning debt and the renewed prospect of inflation as the economy recovers from the depths of the recent recession.

The shift is sure to come as a shock to consumers whose spending habits were shaped by a historic 30-year decline in the cost of borrowing.

“Americans have assumed the roller coaster goes one way,” said Bill Gross, whose investment firm, Pimco, has taken part in a broad sell-off of government debt, which has pushed up interest rates. “It’s been a great thrill as rates descended, but now we face an extended climb.”

The impact of higher rates is likely to be felt first in the housing market, which has only recently begun to rebound from a deep slump. The rate for a 30-year fixed rate mortgage has risen half a point since December, hitting 5.31 last week, the highest level since last summer.

Along with the sell-off in bonds, the Federal Reserve has halted its emergency $1.25 trillion program to buy mortgage debt, placing even more upward pressure on rates.  The 30-year fixed rate before the Federal Reserve bailout plan was 6%.  When the government bailout plan went into effect, consumers saw interest rates fall to historical lows below 4%.  Experts believe the end of the bailout plan on March 31 will spark a rise in mortgage interest rates back to levels before the bailout plan went into effect.

Each increase of 1 percentage point in rates adds as much as 19 percent to the total cost of a home, according to Christopher J. Mayer, a professor of finance and economics at Columbia Business School.

Mortgage Calculator

The Mortgage Bankers Association expects the rise to continue, with the 30-year mortgage rate going to 5.5 percent by late summer and as high as 6 percent by the end of the year.

“We’ve gotten spoiled by the idea that interest rates will stay in the low single-digits forever,” said Jim Caron, an interest rate strategist with Morgan Stanley. “We’ve also had a generation of consumers and investors get used to low rates.”

Free Report: 6 Things You Must Know Before You Buy

For young home buyers today considering 30-year mortgages with a rate of just over 5 percent, it might be hard to conceive of a time like October 1981, when mortgage rates peaked at 18.2 percent. That meant monthly payments of $1,523 then compared with $556 now for a $100,000 loan.

No one expects rates to return to anything resembling 1981 levels. Still, for much of Wall Street, the question is not whether rates will go up, but rather by how much.

Some firms, like Morgan Stanley, are predicting that rates could rise by a percentage point and a half by the end of the year. Others, like JPMorgan Chase are forecasting a more modest half-point jump.

But the consensus is clear, according to Terrence M. Belton, global head of fixed-income strategy for J. P. Morgan Securities. “Everyone knows that rates will eventually go higher,” he said.

Source: New York Times

During March, Oahu sales of 282 single-family homes and 392 condominiums were reported through the Honolulu Board of Realtor’s MLS, decreases of 14.5 percent for single-family homes and 27.5 percent for condominiums, compared to the same month last year. This brings total single-family home sales on Oahu to 673 for the first three months of 2008, a decrease of 22.2 percent over the same time period one year ago. Total condominium sales through February were 1,037, a 23.8 percent decrease from last year.

While the number of sales continued to decline, the most important statistic shows Oahu real estate is holding its own. The median prices paid for Oahu properties were $628,000 and $329,300, respectively, a small decrease of 2.4 percent for single-family homes from the March 2007 price and an increase of 2.6 percent for condominiums. While single family prices declined, the small percentage is almost a welcome relief when comparing real estate markets across the country. The total dollar sales volume generated in the housing market for the first three months of the year was $974.1 million, a decrease of 18.0 percent or $213.1 million, compared to the $1.187 billion produced one year ago.

What Does All of This Mean?

“The Oahu median prices for both single-family homes and condominiums are still constant, while the sales volume for the market has slowed,” said Dana Chandler, President of the Honolulu Board of REALTORS®. “Even with the instability in the finance industry, the market for Oahu residential properties appears to be holding, unlike the very negative conditions we hear about on the Mainland.”

“There is a continued demand for residential properties, especially in the high-end, which could be an outgrowth of the weaker U.S. dollar and other local factors, such as our low unemployment and pleasant climate,” added Harvey Shapiro, Research Economist at the Honolulu Board of REALTORS®. “The limited availability of land and housing on Oahu should prevent any significant downturn in prices.”

Hawaii’s Aces in the Hole

How is it possible that Hawaii is not experiencing the same doldrums as the U.S. mainland? While it is true that Hawaii has experienced a downturn in the real estate market, few people acknowledge two variables unique to Hawaii’s real estate; 1) A desire shared worldwide to live in Hawaii and 2) The finite nature of real estate available to buy in Hawaii. When you consider a global base of buyers wanting to own a home in Hawaii and combine that with the physical limits of being one of the smallest land masses, it may not be so surprising after all. Also, as pointed out by Harvey Shapiro, the week U.S. dollar is giving foreign buyers much more for their money.

*Source: The Honolulu Board of REALTORS®

Elliot Lau

History of the Housing Market

Source:  Yahoo Video / ABC News

This is a new act designed to boost the U.S. economy by providing tax rebates to individuals and tax incentives for businesses and was just passed on February 13, 2008.

Check with your CPA or tax person regarding details on this new Act.

Recovery rebates:

To stimulate the economy eligible individuals will begin receiving rebate checks after the April 15^th tax deadline.

The amount of the rebate will be either $600 ($1,200 if filing jointly) or your 2007 income tax liability after credits, whichever is less. This will apply as long as the taxpayer has either:

- Tax liability of at least $1 and gross income greater than the standard deduction plus one personal exemption (2 if filing jointly) or

- At least $3,000 of qualifying gross income (earned income, Social Security and certain veterans’ benefits).

The rebate for taxpayers with dependent children will also be increased by $300 per qualifying child. Child must not have reached the age of 17 before the end of 2007 and must have a Social Security number.

Business investment incentives:

The package also creates incentives for business investment by increasing the Section 179 limit for initial year expensing to $250,000 (from $128,000). The Section 179 expensing election allows a current deduction for newly acquired assets, which would have to be depreciated over a number of years. The new higher limit applies for calendar year 2008 or a business’s fiscal year that begins in 2008.

There is also a provision which offers a special allowance for certain property. This is in addition to any such property that qualifies for Section 179 expensing. For eligible property the special depreciation amount is equal to 50% of its adjusted basis. The following types of property qualify for this special depreciation:

- Tangible property with a recovery period of 20 years or less,

- Computer software purchased by the business,

- Water utility property, and

- Qualified leasehold improvement property.

Temporary loan limit increases:

The act increases the dollar loan limit from $417,000 to $729,750. The increase is to reduce predatory lending practices on borrowers seeking loans in excess of the current limits. The increases are in effect for loans made or approved for origination through the end of 2008.

Check with your CPA or tax person to learn more about this new act.

Often you can find the condition of an area by looking at demand and many times unbalanced markets can be an indicator of property value insulation. In the chart below are 4 counties that show total active resells and distressed banked sales.

What I found interesting is that Orange County has the second highest percentage of distressed sales with the highest percentage of bank REOs. Also it is remarkable to see that the total market percentage of bank distressed sales for 4 counties runs over 17% with 20% of those as Bank Owned Properties.