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Very little if any correlation. Look at the 70's, interest rates increased significantly with little to any decline in home prices. Reference late 2000's, interest rates go down and house prices go down. There are some times some areas where they seem to correlate but there are also times where they move in tandem.
Last edited by Green Irish Eyes; 01-26-2011 at 03:24 PM..
There hasn't been any correlation to that fact that interest rates are related to home prices.
See this chart:
Very little if any correlation. Look at the 70's, interest rates increased significantly with little to any decline in home prices. Reference late 2000's, interest rates go down and house prices go down. There are some times some areas where they seem to correlate but there are also times where they move in tandem.
First of all, looking at a chart from prior history will shed little light on what will happen in the years to come since we are literally in uncharted territory for the housing market.
You have to understand that home prices will not fluctuate as much as interest rates. Looking at that chart, I actually do see correlation. Your note to look at the late 2000s completely leaves out the fact that we were in the throes of the Great Recession. Demand for almost everything dropped like a rock, particularly for the overheated housing sector. There was also a mess of housing oversupply generated by cheap money (low interest rates).
Since prices have fallen while rates have also fallen is a rather ominous sign of significant pain to come. Also, consider that taxes are probably going to go up in the years to come, and income levels are falling (translation, much lower discretionary income for housing).
Your note to look at the late 2000s completely leaves out the fact that we were in the throes of the Great Recession. Demand for almost everything dropped like a rock, particularly for the overheated housing sector. There was also a mess of housing oversupply generated by cheap money (low interest rates).
That was my point, interest rates do not correlate to what the housing market is doing. Is is responding to outside national and local pressures NOT interest rates.
That was my point, interest rates do not correlate to what the housing market is doing. Is is responding to outside national and local pressures NOT interest rates.
If that wasn't your point, then why include the historical chart and references about interest rates?
My point was that excluding the Great Recession, where everything is basically screwed up, that housing prices DO CORRELATE with interest rates.
How can they not when they are a direct functional input on price?
Let me ask this -- Would interest rates affect housing prices if they were 100%? Yes, and there's your answer...
If that wasn't your point, then why include the historical chart and references about interest rates?
To show they don't correlate as much as people say they do...I thought we already covered that
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My point was that excluding the Great Recession, where everything is basically screwed up, that housing prices DO CORRELATE with interest rates.
How can they not when they are a direct functional input on price?
Let me ask this -- Would interest rates affect housing prices if they were 100%? Yes, and there's your answer...
Maybe slightly, which I acknowledged, but not to the degree that people would have you think.
If you look at that chart, when you see leveling in the late 70's to 80's, interest rates more than doubled from 8% to almost 20%.
In fact home prices didn't drop, they just didn't go up any more when that happened:
You can see in the late 80's, home prices did dip into the negative territory, but interest rates were on their way down.
So maybe no inflation increase, but your investments are earning quite a bit more, imagine earning 15% ROI on a CD like they did back them, hell I could retire right now on that and I'm not even 30.
Wheels - We are living in the age of cheap money, and a very active Federal Reserve. When money is practically free to borrow, you can't try to make sense of interest rate sensitive investments. The further to the right your chart moves, money became easier and easier for borrowers to get.
A lot of things go into the value of home prices, such as wages, inflation, and legislative changes. So, don't let yourself get fooled by the jigsaw patterns.
I think that you're misreading your own charts because you're excluding other relevant data. When I see mortgage rates rise in the early 80's, I see the blue line go down (correlation). Around 1982, mortgage rates are real high, and the blue line is way down (correlation). Around 1983, mortgage rates fall, and you can see the blue line start to inch up (correlation). Around 1986, Reagan's tax reform act killed real estate in some markets, which accounts for the jigsaw pattern in the chart (other forces greater than prevailing interest rates are acting upon price). From 1989 - 1992, there was a massive real estate credit crunch -- Again, more jigsaw patterns.
Your statement that there is no correlation can be debunked by arithmetic. At present, you can get a 30-year loan for a $200,000 mortgage and pay around $1,073 a month (assuming 5% loan). Let's say that interest rates rise, and they will (and probably faster than we'd like). What's the same mortgage at 10%? $1,755, roughly. Interest rates rising will effectively price millions out of the market. Given that environment, sellers have no choice but to substantially lower the price of their home. For the example above, that $200,000 house would have to fall to roughly $122,000 for the mortgage to have the same affordability. I'm not saying that houses will fall that much, but I am saying that there is probably a lot more pain coming for home owners.
That's why home prices will not reach their bottom until we are finished with the next round in interest rate hikes. And, that won't be done for a few more years since we haven't even entered that phase, yet.
All things being equal, there is a very high correlation between the price an individual buyer is willing to pay and the prevailing interest rate for mortgages.
Historically, homes always pretty much followed the inflation rate. Around 1999, that changed.
Wheels - We are living in the age of cheap money, and a very active Federal Reserve. When money is practically free to borrow, you can't try to make sense of interest rate sensitive investments. The further to the right your chart moves, money became easier and easier for borrowers to get.
Yet the ONLY time home prices went into the negative territory was when interest rates were being lowered...which brings us to the next point:
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Originally Posted by WinThePennant
A lot of things go into the value of home prices, such as wages, inflation, and legislative changes. So, don't let yourself get fooled by the jigsaw patterns.
Yes I know, which is why I wrote this further up:
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Originally Posted by wheelsup
That was my point, interest rates do not correlate to what the housing market is doing. Is is responding to outside national and local pressures NOT interest rates.
Quote:
Originally Posted by WinThePennant
Your statement that there is no correlation can be debunked by arithmetic. At present, you can get a 30-year loan for a $200,000 mortgage and pay around $1,073 a month (assuming 5% loan). Let's say that interest rates rise, and they will (and probably faster than we'd like). What's the same mortgage at 10%? $1,755, roughly. Interest rates rising will effectively price millions out of the market. Given that environment, sellers have no choice but to substantially lower the price of their home. For the example above, that $200,000 house would have to fall to roughly $122,000 for the mortgage to have the same affordability. I'm not saying that houses will fall that much, but I am saying that there is probably a lot more pain coming for home owners.
With interest rates @ 10% there are other issues at play - most likely a roaring economy and huge job growth leading to more disposable income. Not to mention large investment gains from CD's yielding 7%-8%. More of my thoughts on this further below.
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Originally Posted by WinThePennant
That's why home prices will not reach their bottom until we are finished with the next round in interest rate hikes.
Totally dependent on the local economy though. There are places in the US and overseas where home prices are increasing rapidly even with large increase rate increases (namely China and Australia). Speaking specifically of Raleigh, I have an optimistic view because of the rather recession proof industries here such as medical fields and higher education as well as tech.
If NC can keep its taxes low (imagine what zeroing out the income tax would do to our economy? HUGE) and attract investment from outside the state we will all do well on our homes, regardless of the interest rates.
Quote:
Originally Posted by WinThePennant
All things being equal, there is a very high correlation between the price an individual buyer is willing to pay and the prevailing interest rate for mortgages.
For your example, going from 4% to 10% overnight certainly would kill home sales - at least initially. But that is a 250% jump in interest rates over night. Doing so gradually hasn't historically ever led to a decrease in home prices.
Your contention is that higher interest rates means lower home prices due to affordability. Very logical and of course certainly I agree that it has some merit if that was the only thing that changed in our economy. However, my contention is that while you may find some areas on the graphs to support that, there are many that do not. Therefore, if that is not 100% accurate, it is wrong. Interest rates are an "effect", not a "cause". An example of a cause would be high job growth, wage inflation, etc which leads to higher interest rates. Or of course, the opposite, like we have had since 2008. Loss of jobs, cutting of interest rates, falling home prices.
Wheels - Let me guess, you are a realtor or a broker or someone who makes their money in real estate, right?
What you're telling me is that now is always a great time to buy, and property values always go up, and nothing can get in the way of real estate always being a great investment...
Income taxes will only be zeroed out in fantasy land and Republican dreams... In the real world, bills have to be paid and that is done with taxes.
Correlation is almost never perfect. Statistically, the correlation coefficient is a value between 0 and 1. 0 is no correlation at all. 1 is perfect correlation. If a measure is less than 1, then that just means that it has less that perfect correlation -- It doesn't make it "wrong."
Last edited by WinThePennant; 01-24-2011 at 03:34 PM..
No I have no connection to the Real Estate market other than owning a house, nor does anyone in my family. But I did stay at a Holiday Inn express last night.
I never said now is a great time to buy. I said I was optimistic about our local area.
I understand your point, but IMO interest rates are merely an effect and do not cause home prices to become affordable or not. In fact, we are at record low mortgage rates in the history of this country, yet housing is the worst it has ever been as far as declines in prices go. Not sure about sales, I really don't know.
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