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My intuitive sense is that it should destroy the real estate market. Anything that I'm missing in that analysis?

matwood 9y ago
Depends on how fast it rises, and if wages can keep up. Obviously the slower the better. But yeah, the optimal time to buy RE is when rates are high and then refi when they drop.
mhewett 9y ago
History. In the late 1970s you could get 17% return on your savings account and mortgage rates were well above 10%. People still bought houses.
- toasterlovin 9y ago
  I'm not talking about a steady state. I'm talking about the transition from a low interest rate regime to a high interest rate regime.
- kazinator 9y ago
  If someone barely qualified for a mortgage in a 2% environment, and now suddenly is faced with 10%, that's a bit of a shakedown.
  - djrogers 9y ago
    Nobody, anywhere, ever, in the history of this topic, has suggested the fed would raise rates such that rates would 'suddenly' jump to 10%. That's the straw-iest of straw-men.
jpetso 9y ago
When interest rates rise, prices fall. New buyers have a certain amount of money they're willing to pay each month and the market adjusts to that, so it makes little difference there. Existing owners would be the ones getting hit by rising interest rates, just as they were bagging outsized profits when rates were falling.
- toasterlovin 9y ago
  Yeah, I guess I meant that house prices would crater. Obviously some people benefit from that and some don't. My intuition is that it would also precipitate an economic downturn. Many households will see a drastic deterioration of their balance sheets, which should act as a damper on consumer spending. Which would, in theory, have 2nd order effects on the real estate market...
  - kurthr 9y ago
    People won't be able to borrow against their lost wealth either (or only at very high rates). Builders/Flippers will stop spending and so the construction trades will suffer a lot... ditto RE sales people and their 6% commissions. I don't think inflation would be high for long.
- BenoitEssiambre 9y ago
  Existing owners wouldn't really be affected if they plan to live in their house as it's just paper wealth that they can't access until they sell anyways. Those that downsize just after interest rates rise in order to spend the value locked in their house might lose a bit depending on whether any of the money is reinvested in something else after they sell. People who will lose the most are house builders. Their revenue is directly tied to house prices. However, for a rate rise to be sustainable there has to be other good ways to make money out there otherwise rates will likely quickly go down again.
voisin 9y ago
High rates and inflation tends to reflect an overheated, strong economy. This usually signifies higher demand for real estate and lower cap rates (higher valuations). Nothing happens in a vacuum so it depends on relative opportunities elsewhere too.

Depends on how fast it rises, and if wages can keep up. Obviously the slower the better. But yeah, the optimal time to buy RE is when rates are high and then refi when they drop.

mhewett 9y ago

History. In the late 1970s you could get 17% return on your savings account and mortgage rates were well above 10%. People still bought houses.

toasterlovin 9y ago
I'm not talking about a steady state. I'm talking about the transition from a low interest rate regime to a high interest rate regime.
kazinator 9y ago
If someone barely qualified for a mortgage in a 2% environment, and now suddenly is faced with 10%, that's a bit of a shakedown.
- djrogers 9y ago
  Nobody, anywhere, ever, in the history of this topic, has suggested the fed would raise rates such that rates would 'suddenly' jump to 10%. That's the straw-iest of straw-men.

jpetso 9y ago

When interest rates rise, prices fall. New buyers have a certain amount of money they're willing to pay each month and the market adjusts to that, so it makes little difference there. Existing owners would be the ones getting hit by rising interest rates, just as they were bagging outsized profits when rates were falling.

toasterlovin 9y ago
Yeah, I guess I meant that house prices would crater. Obviously some people benefit from that and some don't. My intuition is that it would also precipitate an economic downturn. Many households will see a drastic deterioration of their balance sheets, which should act as a damper on consumer spending. Which would, in theory, have 2nd order effects on the real estate market...
- kurthr 9y ago
  People won't be able to borrow against their lost wealth either (or only at very high rates). Builders/Flippers will stop spending and so the construction trades will suffer a lot... ditto RE sales people and their 6% commissions. I don't think inflation would be high for long.
BenoitEssiambre 9y ago
Existing owners wouldn't really be affected if they plan to live in their house as it's just paper wealth that they can't access until they sell anyways. Those that downsize just after interest rates rise in order to spend the value locked in their house might lose a bit depending on whether any of the money is reinvested in something else after they sell. People who will lose the most are house builders. Their revenue is directly tied to house prices. However, for a rate rise to be sustainable there has to be other good ways to make money out there otherwise rates will likely quickly go down again.

voisin 9y ago

High rates and inflation tends to reflect an overheated, strong economy. This usually signifies higher demand for real estate and lower cap rates (higher valuations). Nothing happens in a vacuum so it depends on relative opportunities elsewhere too.