**If** rates trend upward (I have no idea if they will), there seem to be two schools of thought:

1) Rising rates will pressure buyers to pull the trigger and the renewed market will see some price stabilization.

2) Rising rates will cripple home prices even further as the gap between cost and buyer's budgets grow exponentially.

Personally, I think rising national rates will damage housing prices within the city limits (at least in the short term). The city seems a bit behind the eight ball as a lot of popular neighborhoods are still overpriced (i.e. first time buyers can't enter the market) to begin with. So if the interest variable rises and taxes are unchanged, the only way to make the equation work will be you drop the principle price.

If Baltimore still had a lot of momentum, I don't believe a higher rate would be that big of an issue, but unfortunately the pendulum is swinging a little in the other direction right now for the city...

...At least Baltimore is still able to attract the DC workers, or else it would be in a much worst situation for everyone.

Nick T.

With all the problems with Freddie and Fannie, rates will have to stay at least as high as they are now. A related question is, will rates rise realtively more than prices fall? Or will the rates drive prices even further down. It makes me very wary of buying anytime soon.

I agree with Nick T. - buyers have certain budget in mind, so if the rates are higher and everything else is the same, the principal they can afford goes down.

I'm hoping though that the rates won't go up too much, because this will pretty much kill already not so vibrant market.

Personally, I'm seriously considering renting for another year. Economy is slow, rates are high, home prices are still too high. I don't think I'll make much profit if I buy now vs. the year from now.

By the way, another possible conversation-starter - front foot assessment fees. In some areas they are as high as 1200$ per year. Why are they even legal?

potential buyer "A related question is, will rates rise relatively more than prices fall?"

Interesting, let's put some numbers into a simple scenario to see what kind of drop in housing prices would be required for a monthly "net-neutral" outcome. This will not include any HOA, closing close, or other misc variables.

House price today: $200k
Interest: 6.5%
Tax Rate: 2.268
Insurance: $720/yr
20% down (no PMI)
30yr fixed.

This base would make a monthly PITI of $1449.30

Changing the Interest to 7.5% would raise the PITI to $1556.74

In order to get the PITI back down to the original level, the principle cost would have to drop to appox. $185,000

So in this instance, one percentage point would require price to erode 7.5% for houses to "cost the same".

I don't think this is an impossible feat in most Baltimore City neighborhoods (maybe not the surrounding counties). Anyone disagree?

One possible effect: decrease in mortgage applications.

Today, the Mortgage Bankers' Association reported a 14% drop in applications. It will be interesting to see if this is a trend.

Rising interest rates are definitely not good for the housing market in terms of prices or sales volume holding or increasing.

But, Nick T makes a good point about what it would take in home price declines to offset a 1% increase in mortgage rates. In Baltimore I could see 7.5% declines because demand is just not as strong as Washington with the Federal Government greasing the wheels down there.

Jelena, your comment "I don't think I'll make much profit if I buy now vs. 1 year from now" illustrates the attitude problem that developed during the recent boom. Everyone who is a first time buyer now thinks it only makes sense to own a home if prices are going to increase 10% a year AND be guaranteed to never decline. It's a roof over your head, not a mutual fund. The chance that it might go up in value is a bonus not the primary reason you own a home.

My gut feeling tells me we will be in a 6.375 to 7.375% range for the next 2 years. The rates are still good compared to historic standards.

There is so much restructing going on in the mortgage back bond market that I don't think the drop in sales will matter in terms of interest rates.

My gut feeling also is that we will not see the 2006 top of real estate prices for at least 7 years. This would be similar to recovery time last seen in the S& L and commerial real estate crisis in the early 90's.

JT: "Everyone who is a first time buyer now thinks it only makes sense to own a home if prices are going to increase 10% a year AND be guaranteed to never decline. It's a roof over your head, not a mutual fund. The chance that it might go up in value is a bonus not the primary reason you own a home."

To be fair, not every first time buyer thinks this, but I could not agree more with your sentiment. That is definitely the train of thinking that has gotten so many neighborhoods inflated in the first place...

To Nick T & JT

I don't think the problem is that today's buyer is looking to make a killing. I think we all know that once this bubble bursts (and I for one don't think Baltimore has yet to burst, deflate a little only) Baltimore is due for a steep decline. That's what we're trying to avoid. I could live with losing a few thousand dollars in value, what I can't live with is losing $100K in value and I think a lot of these properties are over-priced by that much.

So, I'm waiting for the price drops that I believe are coming. Again, not to cash out, but in order to avoid losing my shirt.