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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 o

by 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?

by minimax 13y ago

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?