Rich T. noted that in the past there hasn’t been a significant relationship between rates and pricing:

There’s actually very little correlation between interest rates and home valuations, and if anything, homes have tended to get more expensive in rising rate environments (due to rising rates typically being accompanied by rising wages, as well as other external factors).  However, I think that a sufficiently steep and abrupt rate rise could really hurt home prices.

But recall that I am more concerned with minimizing monthly payments than the purchase price.  If rates rose enough to really impact prices, it’s likely that those higher rates would have affected monthly payments even more.  So for a long-term, heavily leveraged purchase, the threat of rising rates is a reason to act sooner rather than later.

tj & the bear agrees, saying that this time it is different:

J6P now has no useful equity, which means any purchase has to be financed in it’s entirety. That puts pricing directly tied to income via the payment, which in turn is determined by rates. IMHO any significant rise in rates will have just as dramatic an effect pushing prices downward as the original drop in rates did in pushing prices skyward.

The FedGov has thwarted previous bear campaigns with the various can-kicking devices in support of big banking, would they let interest rates get away from them?

Last week the Fed stated that they plan to keep rates low through the end of 2014. 

If something went crazy and mortgage rates did start rising, they would have to go up more than 1% to alarm home buyers.  Purchases of homes at an effective rate of 50% off with inflation will still be attractive.

But let’s imagine that rates did hit 5% or higher – what would sellers do?

Let’s examine who is selling today.  Short sales and REO listings only comprise 10% of today’s NSDCC detached inventory for sale.  The rest are probably split between long-termers with substantial equity and those looking to get out with enough for a steak dinner.

If prices went down, those with little or no equity would just stop making payments – then it would be up to the TBTF banks to decide whether they want to cause a foreclosure tsunami, or let the defaulters ride for free as long as they mow the lawn.  You can guess which path they’ll take.

The long-termers with substantial equity?  One more notch down and forget it – they aren’t going to give them away!

The initial scramble to buy something – anything – once rates went up would be exciting, but short-lived.  Fear/greed would overcome buyers who have been very patient, and they’d gladly get back on the fence in anticipation of plummeting prices.

Consider who the sellers would be – only those that need their equity to keep breathing.  The FedGovBigBank troika will take care of the rest.

If mortgage rates start rising, it’ll likely cause fewer and fewer sales.  There is probably enough organic demand who will keep buying with cash or big down payments to have pricing look statistically flat or lower.  But if there are few houses to buy, who cares.

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