Hat tip to Booty Juice for supplying more evidence on the impact of mortgage rates on home prices.
http://seekingalpha.com/article/278146-interest-rates-do-not-affect-home-prices
An excerpt:
At first glance, this is one of those things that makes perfect sense: The same mortgage payment translates to a larger loan value when rates are low. But how does this hold up under statistical scrutiny?
The answer shocked me: They don’t. In fact, history shows the exact opposite is true.
Home prices tend to go up with interest rates:
How Is This Possible? There are two things I can think of to explain what we’re seeing. Either interest rates don’t matter as much as other factors in determining housing prices and the correlation is merely coincidence; or, higher rates harbor, or are harbored in, conditions that favor housing.
The first case isn’t too difficult to imagine. There are many factors that can affect housing: personal income, general economic conditions, supply vs. demand, family formation, population growth, technological innovations like the automobile that enabled suburbia, and so forth. Interest rate consequences can easily be lost in the mix. Maybe, if all other factors were held constant, we’d see a negative relationship to validate conventional wisdom.
The second case is more difficult to explain. Can high rates actually benefit housing prices? High interest rates provide incentive to save. More savings mean healthier consumer balance sheets, better credit and more equity to put down on a home. So higher rates should influence the relative mix between debt and equity capital, but it doesn’t necessarily influence total asset prices.
Click here for more:
http://seekingalpha.com/article/278146-interest-rates-do-not-affect-home-prices
JtR: The 1998-2007 mega-boom was fueled by several additional factors besides improving rates – more favorable taxation that encouraged flippers, exotic neg-am terms with fog-a-mirror qualifying, and 100% financing.
The surge of baby-boomers coming of age had to play a significant role from 1970-2007.
We were buying houses because Americans always did – why wouldn’t you, prices always went up?
Booty Juice? In a discussion about interest rates and housing prices? Oh man, I love the Internets.
In the past, I can see why there was little correlation between price and interest rate.
At times, significant inflation led to tighter monetary policy, nominal incomes were keeping up with interest rate increases.
With a strong economy, psychology was to get in sooner rather than later. Except for last decade, this always proved right.
As JTR mentioned, baby boom demographics was certainly a factor as well as tax treatment.
Assuming the economy improves, same thing could happen again. Psycology of the train leaving the station can be very powerful and self sustaining. If you want to buy a house when rates are 6% and you think they are going to 9%, you pull the trigger.
The big unknown this time is what if the rise in interest rates is because T-bills implode. I don’t think anyone can make predictions under this scenario based on past data.
But as JTR has suggested, seems reasonable that in North County at least, inventory would just dry up.
Govt may respond with policies similar to the 70’s and prevent lenders from exercising due on sale clauses to prevent sales. Folks locking in long term cheap rates now would be in the driver’s seat. Anyone remember the “Wellencamp” era?
I look at that graph and observe, that green line has a way to go (down), in order to look, and thus return to a more historic norm in ratio with the red line.
I definitely agree if the trend from the 1940s and 1950s is going to continue.
The chart needs income and/or GDP to be charted relative to interest rates.
As Kinside wrote, if rates go up because the economy/wages are expanding then great and housing may rise in spite of higher rates.
If rates rise because of fear/imploding Treasuries (absent income/gdp growth) then housing falls.
Don’t think anyone knows if/when the economy/rates begin to move, hence the attraction of hunkering down and doing nothing and earning zero % by many people.
Step up and place your bets on one or the other.
This is where multivariate statistical analysis comes into play. With several processes trending in roughly the same direction, it is easy to draw the wrong conclusion. Home prices clearly accelerated with the secular decline in interest rates beginning with the Fed’s response to the dot.com bubble. Whether rising interest rates lead to a decline in real home prices or just slow growth is something we will perhaps discover in the next decade.
It’s a bit odd, but at first blush that chart looks a lot like a positive correlation and 30 year lag between interest rates and the index…
If I recall correctly, high interest rates tend to correlated with other macroeconomic factors like good employment conditions that are likely to raise real estate prices.
Am I safe to assume that the green line is for nationwide home prices??? If so, let’s not forget that the study of residential real estate needs to be narrowed down, and refined, to as narrow of a MICRO level as you can — State, City, Zip Code, School District, Neighborhood, even as far down as Street if possible… and, price is really a function of supply and demand. Sure, interest rates effect demand, but the market, and its trends, need to be examined in a MICRO fashion.
Somehow I got a mention here, mixed in with other SoCal realtors:
http://blog.movoto.com/real-estate-and-more/socal-agent-responses-on-ca-real-estate-market/
The first guy is a hoot, this is off his blog:
This is a miserable time to be a realtor. Over the last five years, 21% have let their licenses lapse, total commissions are down over 40%, and 12% of realtors have reported losing homes. It’s hard to feel too sorry for many of them.
Here is the group of NorCal realtor opinions:
http://blog.movoto.com/real-estate-and-more/norcal-agent-responses-on-ca-real-estate-market/
What matters is real rates. Interest rates were high in the 80s but so was inflation. So real rates were much lower. Also, because inflation was high, prices continued to go up. You’ve got to adjust for inflation.
I’ve already stipulated that — historically speaking — rates were not a major factor in housing prices.
However, in addition to checking median household income growth it would be good to check homeowner’s average equity as well during those periods. Equity is the lifeblood of the move-up market, and move-ups constitute the bulk of the market. It’s equity that allows people to purchase homes greater than their incomes will carry (i.e., higher that 3xMHI).
Does anyone doubt that lowering rates fueled the bubble? [The relaxation of standards came after the bubble was already forming.] We also know that a large number of bubble buyers bought at or beyond their capability to pay.
These factors render late 20th century comparisons irrelevant, and I fully expect any rise in rates to come directly out of the hide of housing prices (for the 99%’ers, of course).
Hey Jim,
We mentioned you on our blog today because you responded to our inquiry yesterday with a solid response. We have an associated infographic to the link you posted above.
Jim,
Is that first one Larry Roberts you’re referring to?
I like Larry, and yes, his blog is over the top. That’s the only way you can buy eyeballs in the intertubes, it seems (look at drudge, tmz, etc), but I don’t think he as a pulse on the market.
The old blog he used to write for has turned into a broker, so … I wonder out loud if his negative slant has anything to do with that split (of course, officially they’re not related)
A lot of the people on that are very familiar (if not interwebs friends), there’s a lot of diverse opinions on where things are going. However, of all of them, I believe you have the most realistic view of the market. It is red hot if you price your property right, and if you’re looking at recent comparable sales ranges as a buyer.
We’re going to look at a house in the morning that already has multiple offers (we’re in the counter best and final stage now), and we haven’t even seen the place yet. It only went on the market 2 days ago. We had our offer in within 24 hours of the listing. This is our second bidding war in a row. Let’s hope we get this one!
Chuck
Yes.
You can tell how successful an agent is are just by listening to their babble.
1. Whining about tight financing? Haven’t sold a house since 2007, back when the only business they could generate were subprime deals.
2. Bad-mouthing the banks/government, and spewing doom? Reading blogs instead of selling.
3. Complaining about other agents? In the game, but flailing.
4. Talking about tight inventory, and frustrated by bidding wars? Working with buyers but not selling much.
5. Writes a daily blog that constantly talks about bidding wars, tight inventory, and rampant short-sale fraud and on occasion mentions his stellar bidding-war success rate? Now we’re talking.
Good luck Chuck!
Your 5-item list is the best, JtR! But I see a few omissions on #5. You need to add:
1. 25+ years of experience
2. Offers professional, knowledgeable advice
3. Has a network who works with him (“Wifey” Donna, etc) so your property does, in fact, close on time
4. Able to dissect the real pros/cons on a prospective house–unlike other agents whose only vocabulary is: “light and bright”.
And did I mention your reputation for stellar integrity in a profession that is a sea of unethical, outright-stupid agents just out for a quick buck?
Did I miss anything? Yep, has a sense-of-humor when you least expect it so that the process of home buying/selling won’t be so daunting and stressful.
I think your humility stopped you from completing #5, Jim, so I feel compelled to add to your list. Keep up the great work! My knowledge of RE would be much less if I hadn’t had a daily addiction to bubbleinfo for nearly 3 years…
I second that, good luck chuck!