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Rates don't have much of an impact on affordability. If rates drop dramatically, then home prices rise in near lock-step, all those looser dollars flowing right
by sjwalter 5y ago
Rates don't have much of an impact on affordability. If rates drop dramatically, then home prices rise in near lock-step, all those looser dollars flowing right back into the housing market. It means that with the same monthly payment, you're able to afford more (and people seem to shop based on what monthly payment they can afford, and are encouraged to do so by everyone from realtors to bankers). The inverse is true, too, with prices falling as rates increase (gee, remember way back in the day when that used to happen? 2018 was wild!).
- listenallyall 5y agoThe OP stated price of the house was 6x, I'm pointing out the contrast in rates is the biggest driver of the change. Second, you're simply wrong. Yes, of course prices rise when rates drop (that was my original point), but not proportionately, and it absolutely does affect affordability. People flood the market when rates start to drop because they THINK that it's a great deal, and that pumps prices beyond what is proportional. It happened in 2004-7, it happened in 2013-19 (then shit got crazy for even more reasons). Further, the down payment required for an $800k house is a whole lot more than when that same house was $350k -- and people could build that down payment by earning 6, 7, 8% in a savings account. To top it off, the guy buying at 10% rates is likely going to be able to refinance at 7, or 5 or even less at some point during the 30 year life of the mortgage. What is the impact of refi when you start with a 2.75% mortgage? Higher RE prices also raise associated costs -- the transaction costs, RE taxes, overall debt ratios, etc.