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I think the methodological flaw here is the assumption that nominal housing prices are elastic. Housing expenses fell over the last ~30 years as interest rates
by lumost 4y ago
I think the methodological flaw here is the assumption that nominal housing prices are elastic. Housing expenses fell over the last ~30 years as interest rates fell, however it's highly unlikely that the reverse will hold true to the same tune. If interest rates go to 10%, people will stop trading housing rather than take a nominal hit and be under water on a mortgage.
This means that as interest rates rise, housing expenses may spike - forcing employees to demand more money. Given the size of the housing budget in many households, this effect could be surprisingly strong.
- imtringued 4y agoWhat people don't seem to understand is that the interest rate doesn't really change your monthly payment in aggregate for housing as you are competing with other people on the monthly payment who get roughly the same interest rate. If the interest rate goes up, more of your monthly payment goes to the bank and less to the existing homeowner. This is only beneficial if you can buy a house outright with cash i.e. the rich get to buy the dip.
- sokoloff 4y agoI think house sale prices are well understood to be sticky. (Sellers really hate the thought of bringing a check to the closing, so when prices are such that their equity after commission goes negative, housing listings and sales do indeed slow down.) I don't think the CPI methodology makes any assumption about elasticity of any particular component, though; it's a measurement process. People who are making interpretations or predictions based on CPI might be using faulty assumptions.
- gedy 4y agoMany people will, sure. But there's many people who either need or want to sell and that puts pressure on prices. Seen this many times in past decades in California at least.