5 ms·

The part about high price/low interest rate vs the opposite was really helpful. I am trying to figure out how to think about this so it's well-timed. Thanks.

minimax 13y ago
I have seen this argument (that higher interest rates will lead to lower prices), but it would be nice to see some historical (or at least anecdotal) evidence of it. I think at least one problem is that it assumes wages will remain flat. If wages start improving, home buyers will be able to spend more money on their mortgage each month which would tend to prop up prices.
- dxhdr 13y ago
  The data is out there, but really it's common sense. On the margin, a buyer purchases a house with a monthly payment he/she can afford. The monthly payment is determined based on the purchase price of the house and the interest rate. The higher the rate, the higher the payment. If rates raise, the margin buyer will no longer be able to purchase the same priced house. Prices must fall to clear the market. Yes, increased wages could help make up for the gap. Wages do not have to rise with interest rates (stagflation).
  - minimax 13y ago
    I understand the theory, but when I look at the data it looks like: http://research.stlouisfed.org/fred2/graph/?g=mth http://research.stlouisfed.org/fred2/graph/?g=mth The last real period of rising mortgage rates was in the 70s. You can pretty clearly see that home prices were rising in spite of rising financing costs.
    - VLM 13y ago
      More like very early 80s. On the other hand, the price of everything more than doubled in the 70s due to stagflation.
- VLM 13y ago
  "If wages start improving" LOL a better assumption over a large non-tech area and long term is the median wages are permanently dropping, not holding steady or rising. That has a certain effect on the dollars that will be available for monthly housing payment even if interest rates are dropping. Look at, say, Detroit. If you want to clear a market, supply and demand insists that the median income dude will live in the median quality house. All the interest rate controls is given the median dude's fixed (dropping) monthly housing budget, how much of a reward does the previous owner get from the check the bank cuts for the new owners mortgage?
muzz 13y ago
The top for interest rates was in ~1982. Not sure how anyone can try to time macro trends that have happened on 30-year time scales.
zurn 13y ago
The central banks lower interest rates when the economy is stalling. Conversely, central banks set high interest rates when the economy is overheating. If low interest rates would make housing overpriced and high rates would make housing underpriced, it would mean housing was cheap pre-2008 and expensive in 2008-2012. Was it so?
- deleted 13y ago
  [deleted]
matwood 13y ago
People buy houses on payment. Obviously the best time to buy would be when rates are very high and drive down absolute prices (and hopefully rates fall soon after so you can refi). The problem is the 80s to now is a 30 year time scale. Are you willing to wait for high rates, possibly years, that may never happen?

minimax 13y ago

I have seen this argument (that higher interest rates will lead to lower prices), but it would be nice to see some historical (or at least anecdotal) evidence of it. I think at least one problem is that it assumes wages will remain flat. If wages start improving, home buyers will be able to spend more money on their mortgage each month which would tend to prop up prices.

dxhdr 13y ago
The data is out there, but really it's common sense. On the margin, a buyer purchases a house with a monthly payment he/she can afford. The monthly payment is determined based on the purchase price of the house and the interest rate. The higher the rate, the higher the payment. If rates raise, the margin buyer will no longer be able to purchase the same priced house. Prices must fall to clear the market. Yes, increased wages could help make up for the gap. Wages do not have to rise with interest rates (stagflation).
- minimax 13y ago
  I understand the theory, but when I look at the data it looks like: http://research.stlouisfed.org/fred2/graph/?g=mth http://research.stlouisfed.org/fred2/graph/?g=mth The last real period of rising mortgage rates was in the 70s. You can pretty clearly see that home prices were rising in spite of rising financing costs.
  - VLM 13y ago
    More like very early 80s. On the other hand, the price of everything more than doubled in the 70s due to stagflation.
VLM 13y ago
"If wages start improving" LOL a better assumption over a large non-tech area and long term is the median wages are permanently dropping, not holding steady or rising. That has a certain effect on the dollars that will be available for monthly housing payment even if interest rates are dropping. Look at, say, Detroit. If you want to clear a market, supply and demand insists that the median income dude will live in the median quality house. All the interest rate controls is given the median dude's fixed (dropping) monthly housing budget, how much of a reward does the previous owner get from the check the bank cuts for the new owners mortgage?

muzz 13y ago

The top for interest rates was in ~1982. Not sure how anyone can try to time macro trends that have happened on 30-year time scales.

zurn 13y ago

The central banks lower interest rates when the economy is stalling. Conversely, central banks set high interest rates when the economy is overheating. If low interest rates would make housing overpriced and high rates would make housing underpriced, it would mean housing was cheap pre-2008 and expensive in 2008-2012. Was it so?

deleted 13y ago
[deleted]

matwood 13y ago

People buy houses on payment. Obviously the best time to buy would be when rates are very high and drive down absolute prices (and hopefully rates fall soon after so you can refi). The problem is the 80s to now is a 30 year time scale. Are you willing to wait for high rates, possibly years, that may never happen?