How inversely related are housing prices and interest rates? | TigerDroppings.com

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LSUtoOmaha
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Nashville
Member since Apr 2004
21273 posts
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How inversely related are housing prices and interest rates?



In times like these, during which interest rates are the lowest we have seen in years, most will tell you that there is a never a better time to invest in a home.

I'm wondering, however if this is a fallacy. It would seem to me like the price of homes/other private real estate itself would
increase as rates plunged to all-time lows, thus neutralizing the effect. Anyone have evidence either way?







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bamanmemphis
Alabama Fan
Member since Sep 2009
647 posts

re: How inversely related are housing prices and interest rates?


You are correct.

The people that are building now in the 300-350 range would have been building in 200-250 range when interest rates were higher.

People tend to spend toward the top of their budget on housing.






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wegotdatwood
Arkansas Fan
Member since Aug 2009
17094 posts

re: How inversely related are housing prices and interest rates?


quote:

People tend to spend toward the top of their budget on housing.




Why? I've heard this. Is it for a better resale?






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bamanmemphis
Alabama Fan
Member since Sep 2009
647 posts

re: How inversely related are housing prices and interest rates?


quote:

Why? I've heard this. Is it for a better resale?


Yeah, its the best investment.







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ItNeverRains
LSU Fan
Franklin, TN
Member since Oct 2007
6917 posts

re: How inversely related are housing prices and interest rates?


In Middle TN, its a great time for buying/building your dream home.





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Gr8t8s
Alabama Fan
Member since Oct 2009
578 posts

re: How inversely related are housing prices and interest rates?


I've seen the stats before, just can't remember them. The National Association of Realtors posted falling median and average home prices for several consecutive years. So, on AVERAGE, yes, with rates this low, it is the best time to buy a home because you are paying less for more home than 5-7 years ago.

All markets are different, though and some buck the trend. There are many cities in which home prices have continually risen during the recession. If you're in one of these cities, prices are higher, but you'll still probably never be able to get interest rates like this for the next 20+ years (barring total economic collapse and assuming some type of recovery).

The reason this is viable is because it's a buyer's market. Obtaining financing is so difficult, the pool of buyers is much smaller than it could be. Due to this, sellers have to lower prices to compete. Fewer mortgages, lower interest rates to entice investors to pick them up.

If a higher percentage of people were able to buy homes, then there would be more competition over these homes, thereby creating a seller's market. Prices would then increase and your scenario would be correct. BUT, then investors would start to flood the bond market....making rates go up.






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lsumatt
LSU Fan
Baton Rouge
Member since Feb 2005
12456 posts

re: How inversely related are housing prices and interest rates?


I completely agree.

I actually think you should buy when interest rates are high (and home prices theoretically low). If and when the interest rates drop, you can re-finance so you have a low rate AND bought the house for cheap.



This post was edited on 1/7 at 6:36 pm


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ZereauxSum
LSU Fan
Lot 23E
Member since Nov 2008
9356 posts

re: How inversely related are housing prices and interest rates?


quote:

I'm wondering, however if this is a fallacy. It would seem to me like the price of homes/other private real estate itself would increase as rates plunged to all-time lows, thus neutralizing the effect. Anyone have evidence either way?


This is what would happen if the market were the same as it was in 2006 but its not. Credit requirements are much tighter now. There is pretty much no such thing as a subprime mortgage anymore and you actually have to being cash to close.

So what you're seeing is a lack of demand, not because people don't find the rates to be attractive, but because so many people can't get funding.






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LSUtoOmaha
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Nashville
Member since Apr 2004
21273 posts
 Online 

re: How inversely related are housing prices and interest rates?


That makes sense. So there was basically an external factor (consumer's access to entering the market) which shifted the demand curve over the past five years.





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CajunAlum Tiger Fan
LSU Fan
The Great State of Louisiana
Member since Jan 2008
3221 posts

re: How inversely related are housing prices and interest rates?


quote:

Yeah, its the best investment


After the bubble,I quit looking at it that way.

Houses are places to live, if they appreciate enough to cover the interest paid,it's a bonus.






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ItNeverRains
LSU Fan
Franklin, TN
Member since Oct 2007
6917 posts

re: How inversely related are housing prices and interest rates?


quote:

I completely agree. I actually think you should buy when interest rates are high (and home prices theoretically low). If and when the interest rates drop, you can re-finance so you have a low rate AND bought the house for cheap.


So you would stay out the market after the biggest housing collapse in history and 3.5% 30 year money, wait until rates are at 7-8% normal historical rates, hope home prices adjust down based on rates returning there, then wait for another collapse to refi at 3.5% for 30 years?

Home prices, even in stable markets, are still depressed from 2007 levels, to think they won't return there regardless of 7-8% rates is a little naive imo

I love your BCS posts, but this seems like "trying to catch a falling knife" 101



This post was edited on 1/8 at 6:45 am


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ItNeverRains
LSU Fan
Franklin, TN
Member since Oct 2007
6917 posts

re: How inversely related are housing prices and interest rates?


quote:

That makes sense. So there was basically an external factor (consumer's access to entering the market) which shifted the demand curve over the past


Yes. Before crash a client I had who was a janitor making 30k got a loan approval for 300k. When my team told him we thought he could not afford 300k, he accused us of being racist, and went with another realtor who put him in a 275k house. Market crashed, house lost 30k in value, couldn't afford note to begin with, foreclosed on.

Did get 30% referral fee as agent he switched to worked in same firm






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LSUAfro
LSU Fan
Baton Rouge
Member since Aug 2005
10493 posts

re: How inversely related are housing prices and interest rates?


quote:

So you would stay out the market after the biggest housing collapse in history and 3.5% 30 year money, wait until rates are at 7-8% normal historical rates, hope home prices adjust down based on rates returning there, then wait for another collapse to refi at 3.5% for 30 years?

Home prices, even in stable markets, are still depressed from 2007 levels, to think they won't return there regardless of 7-8% rates is a little naive imo

I love your BCS posts, but this seems like "trying to catch a falling knife" 101
My thoughts as well.






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ZereauxSum
LSU Fan
Lot 23E
Member since Nov 2008
9356 posts

re: How inversely related are housing prices and interest rates?


quote:

That makes sense. So there was basically an external factor (consumer's access to entering the market) which shifted the demand curve over the past five years.


That's exactly right.

I expect that in the next 3-4 years you will see the demand curve shift back to the right some as people get on more sound financial footing and unemployment declines.






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ZereauxSum
LSU Fan
Lot 23E
Member since Nov 2008
9356 posts

re: How inversely related are housing prices and interest rates?


quote:

After the bubble,I quit looking at it that way.

Houses are places to live, if they appreciate enough to cover the interest paid,it's a bonus.


I can't remember where I saw this (could have been here) but there is a Case-Schiller chart that shows inflation-adjusted housing prices indexed to like 1880 levels.

Basically, housing prices in 1880 where 1, an I believe at the height of the bubble (05-06) it was roughly 1.25. In 2002, house prices where right about 1.

My takeaway was that houses are lousy investments over the long run.






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LSUcam
LSU Fan
Destin FL
Member since Dec 2011
381 posts

re: How inversely related are housing prices and interest rates?


I think its also just a really great time to buy a house. Lowest interest rates in history and a large dip in prices create nice values. Just pick the right locations.





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ItNeverRains
LSU Fan
Franklin, TN
Member since Oct 2007
6917 posts

re: How inversely related are housing prices and interest rates?


quote:

My takeaway was that houses are lousy investments over the long run


I disagree, but I look at a house differently than a mutual fund. You can always rent your entire life, I enjoy home ownership and the perks I feel that come with it.







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ZereauxSum
LSU Fan
Lot 23E
Member since Nov 2008
9356 posts

re: How inversely related are housing prices and interest rates?


quote:

I look at a house differently than a mutual fund. You can always rent your entire life, I enjoy home ownership and the perks I feel that come with it.


I think we are on the same page. I'm saying don't buy a home because it may increase in value. I'm saying be a homeowner because homeownership in and of itself is a good thing.

I believe it's almost always (financially) better than renting over the long run. It's just not going to beat traditional investments.






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Doc Fenton
LSU Fan
Member since Feb 2007
51086 posts

re: How inversely related are housing prices and interest rates?


quote:

I'm wondering, however if this is a fallacy.


I certainly wouldn't call it a fallacy. If you can lock in super low rates, then that means a lot, and you can hardly just shrug that off as something that is sure to be neutralized by other effects.

Other effects do exist, of course, but the key is how much you expect the present value of all your future payments to be, relative to how much a real estate investment might cost in other times.

All things being equal, a rise over time in interest rates would put a damper on future home price appreciation. But none of this happens in a vacuum. Interest rates are artificially manipulated based on, among other things, how high home prices are. So there's definitely some game theory type strategy that could be modeled on the periphery, but basically, the system is set up to keep things relatively stable, so as long as you don't buy when home prices are absurdly high relative to rental prices (or when you get a bad financing deal), then I think that should be the primary consideration.

By the way, aren't you the guy who always posted that Shiller chart? (The one below is from about 2.5 years ago.)



He's got all the real home pricing data you would want in his 3rd-to-last paragraph (on his Online Data webpage), and all the interest rate data (and its effect on equities) you would want in his 2nd-to-last paragraph.






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Doc Fenton
LSU Fan
Member since Feb 2007
51086 posts

re: How inversely related are housing prices and interest rates?


quote:

I believe it's almost always (financially) better than renting over the long run. It's just not going to beat traditional investments.


It's something that's inherently difficult to compare to regular investments, because it's extremely difficult to separate the consumption aspect of homeownership from the investment aspect.

The historical data seems to indicate that you might be able to expect about a 1% appreciation in real value per year (compared to about 6-7% for stocks), but even so, how much of that is consumption of a depreciating house that constantly needs maintenance, and how much of that is investment in the real estate upon which the house is constructed?

When you factor in all the complications involving interest tax deductions, capital gains loopholes, insurance, landlord-tenant duties & responsibilities, etc., the big picture just gets more and more confusing.

Probably the best rule of thumb to go by is the multiple of home price to rental costs. When it gets too high, that's a red flag.






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