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Lower interest rates shouldn't result in higher list prices. Yes, as a homebuyer you can offer a higher number on a house to win a bidding war, but why are bank

Lower interest rates shouldn't result in higher list prices. Yes, as a homebuyer you can offer a higher number on a house to win a bidding war, but why are banks allowed to appraise the house so damn high? It's collusion between banks to keep profits high, plain and simple. The price should not be a function of the interest rate, it should be an independent variable. Little has changed from 2008.

mellavora 4y ago
Higher interest rates reduces the supply of potential buyers. Less buyers means the asking price will drop. price is not independent of interest rate, and no collusion is required. Only supply and demand.
abduhl 4y ago
>> Yes, as a homebuyer you can offer a higher number on a house to win a bidding war, but why are banks allowed to appraise the house so damn high? You've answered your own question. The house is appraised high because homebuyers can offer a higher number on a house to win a bidding war.
lbotos 4y ago
> The price should not be a function of the interest rate, it should be an independent variable. And what should that variable be based on? House prices = How much the buyer can afford (savings and income) - Cost of interest You are saying that somehow we should ignore the cost of interest, but like, how??? If interest rates go up, House prices go down. Makes sense to me.
- mariodiana 4y ago
  It would be largely independent if interest rates represented market rates. However, given the power and actions of the Federal Reserve, that will never be so while that institution exists.
  - lbotos 4y ago
    House prices would not be independent of interest rates if "interest rates represented market rates". House prices may be different but the math above still holds. If interest rates are 1%, house prices are "high", because people can "afford more house". If interest rates go to 20%, house prices drop (by about 20%) because more of their money goes to interest. Your point that if the fed didn't control rates that somehow house prices would be independent of interest rates, but that's not how house prices work. What are you seeing that I'm not?
hbosch 4y ago
>Lower interest rates shouldn't result in higher list prices. For the vast, vast majority of homebuyers the only number that matters when purchasing is the monthly mortgage. If the totally monthly payments of a $550,000 house at 6% are the same as a $800,000 house at 3%, well, technically you can pretty much "afford" both houses. In the end, the total paid cost for the house after 30 years is more or less equivalent (assuming your rate is locked and you don't refinance ever).
majormajor 4y ago
What should appraisers go by other than "what other people were willing to pay recently for similar homes"? Look up "appraisal gaps" in 2021 news. Appraisers and banks already try to curb this some - the bank doesn't want to loan more than they could get back if the market changes an over-leveraged buyer goes bust and they owe more than the property is now worth in a new situation - but guess what else happened recently? The stock market went up up up, crypto went up up up, etc... buyers had enough cash to cover the gaps. The difference between now and 2008 is that people had much more numerically-sound financial footings to drive these bidding wars. So I don't expect it to implode without other things imploding first, this time around (you could argue that they had those sound financial footings because of inflation in other markets, like stocks, but the stock market has merely corrected to pre-2020 trends, not imploded).
bick_nyers 4y ago
I understand what the responses are saying, I think I am not communicating my position clearly, which ultimately is a matter of values and opinion. I personally don't believe that housing should be an investment vehicle, or at least, not the primary investment for individuals. I am not an expert by any means, and perhaps I am overlooking details. Housing is currently viewed as an asset, however the system in place provides an asymmetrical risk/reward profile between buyer and bank. Whether a bank finances a house at low price/high interest rate versus high price/low interest rate is of little consequence to their cash flow, in the end, they will make the same amount on interest. The buyer will pay the same amount month over month. Once the homebuyer pays off the home and owns it, when they go to rent or sell, do they benefit from a changing interest rate? No. If the interest rate is now higher, then their list price is now lower. If the interest rate is lower, then their house price goes up yes, but the buyer demand now decreases. The bank has the interest rate as a tool to mitigate their risk, but the individual does not have that tool, so they are exposed to the risk of changing rates, with no upside. If appraisal values were regulated from increasing rapidly, then the bank would be taking some risk away from the buyer. The home seller in that situation would sell for less, but the result would be smoother and more stable of an asset for all individuals. In the current system, the individual is more at risk of over leveraging than the bank, who should know better. The risk of over leveraging should be shifted to the bank, as they have significantly more resources and wisdom to mitigate that.

mellavora 4y ago

Higher interest rates reduces the supply of potential buyers. Less buyers means the asking price will drop. price is not independent of interest rate, and no collusion is required. Only supply and demand.

abduhl 4y ago

>> Yes, as a homebuyer you can offer a higher number on a house to win a bidding war, but why are banks allowed to appraise the house so damn high? You've answered your own question. The house is appraised high because homebuyers can offer a higher number on a house to win a bidding war.

lbotos 4y ago

> The price should not be a function of the interest rate, it should be an independent variable. And what should that variable be based on? House prices = How much the buyer can afford (savings and income) - Cost of interest You are saying that somehow we should ignore the cost of interest, but like, how??? If interest rates go up, House prices go down. Makes sense to me.

mariodiana 4y ago
It would be largely independent if interest rates represented market rates. However, given the power and actions of the Federal Reserve, that will never be so while that institution exists.
- lbotos 4y ago
  House prices would not be independent of interest rates if "interest rates represented market rates". House prices may be different but the math above still holds. If interest rates are 1%, house prices are "high", because people can "afford more house". If interest rates go to 20%, house prices drop (by about 20%) because more of their money goes to interest. Your point that if the fed didn't control rates that somehow house prices would be independent of interest rates, but that's not how house prices work. What are you seeing that I'm not?

hbosch 4y ago

>Lower interest rates shouldn't result in higher list prices. For the vast, vast majority of homebuyers the only number that matters when purchasing is the monthly mortgage. If the totally monthly payments of a $550,000 house at 6% are the same as a $800,000 house at 3%, well, technically you can pretty much "afford" both houses. In the end, the total paid cost for the house after 30 years is more or less equivalent (assuming your rate is locked and you don't refinance ever).

majormajor 4y ago

What should appraisers go by other than "what other people were willing to pay recently for similar homes"? Look up "appraisal gaps" in 2021 news. Appraisers and banks already try to curb this some - the bank doesn't want to loan more than they could get back if the market changes an over-leveraged buyer goes bust and they owe more than the property is now worth in a new situation - but guess what else happened recently? The stock market went up up up, crypto went up up up, etc... buyers had enough cash to cover the gaps. The difference between now and 2008 is that people had much more numerically-sound financial footings to drive these bidding wars. So I don't expect it to implode without other things imploding first, this time around (you could argue that they had those sound financial footings because of inflation in other markets, like stocks, but the stock market has merely corrected to pre-2020 trends, not imploded).

bick_nyers 4y ago

I understand what the responses are saying, I think I am not communicating my position clearly, which ultimately is a matter of values and opinion. I personally don't believe that housing should be an investment vehicle, or at least, not the primary investment for individuals. I am not an expert by any means, and perhaps I am overlooking details. Housing is currently viewed as an asset, however the system in place provides an asymmetrical risk/reward profile between buyer and bank. Whether a bank finances a house at low price/high interest rate versus high price/low interest rate is of little consequence to their cash flow, in the end, they will make the same amount on interest. The buyer will pay the same amount month over month. Once the homebuyer pays off the home and owns it, when they go to rent or sell, do they benefit from a changing interest rate? No. If the interest rate is now higher, then their list price is now lower. If the interest rate is lower, then their house price goes up yes, but the buyer demand now decreases. The bank has the interest rate as a tool to mitigate their risk, but the individual does not have that tool, so they are exposed to the risk of changing rates, with no upside. If appraisal values were regulated from increasing rapidly, then the bank would be taking some risk away from the buyer. The home seller in that situation would sell for less, but the result would be smoother and more stable of an asset for all individuals. In the current system, the individual is more at risk of over leveraging than the bank, who should know better. The risk of over leveraging should be shifted to the bank, as they have significantly more resources and wisdom to mitigate that.