5 ms·
Not really. The challenge is that higher interest rates increase the total cost of buying. Standard demand curves tell us that the quantity demanded at a high
by riknos314 3y ago
Not really.
The challenge is that higher interest rates increase the total cost of buying. Standard demand curves tell us that the quantity demanded at a higher cost is lower.
In a typical market, an increased cost is balanced by sellers increasing the quantity they sell. However since housing is almost exclusively bought with loans, and the current increase in cost is driven by interest rates payed to mortgage brokers rather than the cost of the home passed onto the seller, we don't see the same increase in supply relative to the cost of buying that we would expect in a market not driven by loan dynamics.
Tl;Dr: Higher interest rates increase costs to buyers without increasing profits for sellers, reducing the total number of units selling at a given price.
- taeric 3y agoMakes sense. I was assuming the idea was that you could nudge long term prices a little bit. But I do have to consider that houses are largely bought on loans now. I'd guess that the automobile market is similarly impacted, just has a larger buffer in the used marketplace to eat in some of the negatives? Is there a viable path to lower costs on housing? :(
- lotsofpulp 3y agoBuilding more houses (or condos or townhomes or apartments).
- taeric 3y agoThis doesn't help people that are largely trapped on low interest rates, though?
- lotsofpulp 3y agoI do not understand what trapped means. More housing will reduce prices for housing, for everyone.
- taeric 3y agoThe hypothesis in much of the rest of this thread is that rates going up make it harder to change loans for people. Having pricing go down would similarly make it harder, as they would be taking a haircut on equity. Right?
- lotsofpulp 3y agoWhat does “changing loans” mean? Some people might lose equity if they bought when prices were highest. But they would also be able to buy at a cheaper price. Either way, maintaining a few people's equity is not society's goal. The only reason a loan is harder to get when interest rates increase is because the monthly payment at a given principal goes up, and so the lender needs to see more income to trust the borrower will be able to pay. If the price goes down, and hence the principal goes down, then the monthly payment goes down, so the lender needs to see less income to trust the borrower will be able to pay.
- taeric 3y agoRead the rest of the branch from my opening post. I'm not necessarily claiming that as my hypothesis, but the one that seems common among the replies. Basically, bottom line is people care about monthly payments. Interest rates going up means that the same houses have higher payments. You /could/ expect that prices going down would be enough to keep people happy to move. That is indeed what I was asking at the open. However, stock going down means existing values goes down, which is just another form of trap for people. Specific trap being that many moves are leveraged on older equity, but to get out of the old loans will now require more cash. This is largely because older equity was also under a leveraged loan. In markets that are not so heavily loan driven, the existing assets are straight forward to manage and convert into down payments on new properties. Housing is specifically not that. If I'm misrepresenting that, please correct me.
- lotsofpulp 3y agoOnly a very small portion of people who bought at the peak would be “trapped” - i.e. underwater on their loans such that they would have to pay to sell the house. The vast, vast majority would be more mobile since homes are cheaper, and the cheaper something is, the less money you need to buy it. The government gave a gift to many people in the last 20 years of keeping interest rates near zero and pulling forward all that price appreciation. Unfortunately, the future generation might not want to expect the same treatment.