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Jim Klinge
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Posted by on Jun 6, 2012 in Interest Rates/Loan Limits, Market Conditions | 18 comments | Print Print

Higher Rates = Lower Prices?

I have been converting to a new computer, and it caused an accidental cancellation of the previous post and comments.  Here is a repeat of the post, the comments were great from what I remember!

A few people who stopped by the booth over the weekend were happy to chime in that they are waiting for rates to go up, because then home prices will tumble another 10% to 20%.

But as we’ve been discussing,  potential sellers are already holding out for higher prices, by need or by choice. 

Rising mortgage rates would cause more standoff in the short-term, and the only hope for buyers would be for those underwater homeowners to concede, and finally surrender.  But the banks could kick the can further by utilizing a combination of free rent and short sales, so any spikes in new distressed inventory would be measured.

Some would suggest that logically the overall economy would have to improve substantially before rates would rise.  But I think a bump of 1% or so could happen without notice, and the Fed powers be somewhat limited to correct it.

Mortgage rates went up 1.5% between October, 1998 and May, 2000, so a big jolt to rates isn’t out of the question:

But what today’s potential sellers would do about higher rates appears to be predictable:  Nothing.

If folks haven’t bailed out from being underwater, then they probably won’t care about what rate the buyer is getting.  If they’ve hung on this long, a bump in mortgage rates would likely strength their determination to wait it out.
A longer-term inventory question will be how to resolve the houses once baby boomers are done with them – when they either pass away, or move on to the rest home.

Do the heirs sell them, or move in and spend another generation?  These houses will be in the best locations, but typically in need of substantial repairs and updating.  It’s doubtful that there will be a tsunami, but this category could become the #1 source of sellers over the next 5-20 years.


  1. I will re-create the previous comments here, beginning with one of my all-time favorite commenters, due to his handle – Hu Flung Pu:

    There is little relationship between rising rates and housing prices. During the 70s and early 80s housing prices increased despite rising rates because… wait for it… rents were rising in line with inflation (which was raging).

    So, the issue is NOT a simple matter of rates rising, but rather whether or not rents – the alternative to ownership and paying a mortgage – increase at a similar rate to overall inflation, which will drive long-term rate activity.

    If rents rise roughly in line with inflation… then higher rates will have little impact on housing prices.

    If rents rise at a meaningfully lower rate than inflation, then rising rates may have a negative impact on housing prices.

    So, tell me what rents are going to do vis-a-vis inflation and I’ll have a pretty good idea about how housing prices are going to react to higher rates.


  2. One of the best blog contributors ever, ocrenter:

    Jim, you’re kidding me, there are still people waiting for rates to go up?

    It is in the interest of the biggest debtor nation of the world to keep the interest rate as low and as long as possible.

    who’s going to win the breath-holding contest???


  3. From shadash, the corvair expert and another great friend of the blog:

    The QE3 drumbeat has already started. If something odd happens to the Eurozone QE3 is guaranteed. (Courtesy of the global banking cartel)

    Using history as an indicator for the future. If QE3 happens interest rates will go down even further or stay where they’re at.


  4. I think it was right about here that I said that it is a favorite objection for reluctant buyers to gravitate to the idea that higher rates would cause lower prices.

    The wait for such is keeping them comfortable on the fence.


  5. From my all-time favorite handle, “booty juice”, though I don’t want to know anything more about it, or where it came from!

    At what point on that 30+ year downward slide did rates become “artificially low”?


  6. Good question too, that nobody answered.

    “Artificially low” begin when the Fed was buying MBS, although once they stopped buying the rates went down, to everyone’s surprise.


  7. Tim, another long-time reader, said,

    Recently Bruce Norris spoke at the SDCIA meeting and showed one of his brilliant charts that clearly debunked the myth that higher interest rates cause a drop in sales volume and prices. Bruce set the audience of 300+ folks up by asking “what happens to sales volume and prices when rates rise”? Of course, just about everyone answered incorrectly.

    His chart clearly depicted periods of high interest rates coinciding with rising values. In my own experience I’ve witnessed the resulting flood of fence sitters more than a few times; rates go up, they jump in and cause a highly competitive market filled with multiple offers and … rising prices.


  8. Chuck Ponzi let it out of the bag that after numerous attempts to buy a resale, he finally snagged a new home – Congratulations Chuck!

    Historically rising rates are correlative with rising prices, not causative.

    We just had the world’s largest demographic experiment with Baby Boomers passing into peak spending years. The prices of EVERYTHING went up. What a surprise! I guess macroeconomics might have something right.

    One must be careful about that because someday it will be broken. Look to future demographics to understand where the future goes.

    Nominal prices are not a good indication of risk/reward.

    On another note, we close on our brand new house next week.



  9. ocrenter then asked the obvious question,

    congrats Chuck.

    which also poses the question, if Chuck Ponzi has bought, do you still keep waiting for a “pending” drop in housing prices?


  10. livinincali, who most of the time wants to play devil’s advocate just to drive me crazy, lays out one of his classics that makes me think he isn’t so bad:

    Available leverage is far more important to the housing market than interest rates. A law requiring 20% down and removal of FHA programs would have a far greater effect on the market compared to a 1-2% rise in interest rates.

    I agree that a possible outcome of a major negative economic event might just be a market where nothing sells rather than a decline in prices, but it doesn’t mean much. Everything has an immediate liquidation value even if it’s far below what you would take.


  11. Raj, and infrequent commenter drops this thought which I disputed:

    Interest rates , inflation, rents are minor items effecting House prices.

    Two major components are :
    1)Jobs / Unemployment rates/affordability – Detroit 🙂
    2)Taxation/Policy changes/Mortagage Interest rate deductions.

    I said that jobs and unemployment haven’t budged, yet real estate in every major metro area has taken off like a rocket this year.


  12. Raj rebutted, which is cool:

    Guessing Atlanta is a Metro still 🙂

    Most of the “took off like a rocket” happened near pockets of areas, like interest to employment centers. Also, pockets ,which are of interests to investors.

    BTW “took off time frame” was Nov/Dec 2011 – May2012. As Mr. Greenspan says, there is some froth, not a bubble.

    Also, to note, most of the investors were pushed by the fed to go into realestate , if they need a risk off trade.


  13. madhatter, a commenter newer to the blog but an active participant:

    1. Inventory level – simply the law of supply and demand

    2. Availability of easy credit – People don’t change; they liked to borrow to the max back then and they’d like to do that again now given the opportunity

    These two factors among others have some to do with rising prices.


  14. J. M., who I think just started commenting this week but has had great commentary, left this idea which I need to lay out in a full blog post shortly:

    “A longer-term inventory question will be how to resolve the houses once baby boomers are done with them – when they either pass away, or move on to the rest home.”

    New elevated federal inheritance tax % kicks in January 1st 2013. So does a number of other taxes!

    If you older baby boomers want to help your adult children out with buying a home, do it now.

    The limit on lifetime monetary “gifts” to relatives is higher NOW than it will be after Jan. 1st. (You can give more to your kids now rather than waiting until that limit is CUT January 1st.)


  15. Kishan, a frustrated but patient buyer in north county, said:

    Jobs/Unemployment/Affordability is ALL relative.

    Affordability logic does not necessarily apply to Sought After Locations with ALL-CASH / ALMOST-CASH deals.

    To me La Jolla, Silicon Valley, Manhattan and Nariman Point will always be “SUPER BUBBLE” and NOT AFFORDABLE … but that does not mean anything to the potential buyers for that locations.


  16. I will agree that affordability is a key component to todays’ real estate market, but we need to quit being brainwashed that jobs and unemployment have squat to do with it.

    Around here we have 2-10 buyers for every decent listings, if unemployment got worse and took out half of those, we’d survive nicely. I would be better off!


  17. Another from “booty juice” with a great thought:

    Today the only “risk free return” = pay off yer mortgage. Buy a house you love and can afford with a 15 yr. FRM and pay it off (early?) then live “rent free” the rest of yer life. That’s livin’.

    Debt = slavery.


  18. Sweet. I’ve always wondered what it would be like to have a narrator to my life. Changes my perception.

    Jim, are you going to do this from now on? It might not be a viable business model, but improves the thinking.




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