Interest rates and home prices

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.

Interest rates and home prices

Postby Investing is boring » Sun Jun 30, 2013 7:06 pm

http://www.investingthesis.com/analysis ... ng-prices/

So when we conduct our scenario analysis, we see that a simple increase in the mortgage rate from 5 to 7.5, we would expect to see a 13% decrease in housing prices over three years.


I am not a math wiz. But this paper has some convincing arguments that suggest that housing prices are affected by changes in interest rate, with a 2-3 year lag. As mortgage rates have started to climb, this study suggest that home prices will be affected by the start of 2016. Curious to hear opinions on this study, and thoughts on owning real estate in a rising interest rate environment.

FOR PURPOSES OF FOCUS AND SCOPE - please ASSUME a rising interest rate environment.
Investing is boring
 
Posts: 237
Joined: Tue Apr 09, 2013 12:55 pm

Re: Interest rates and home prices

Postby Investing is boring » Tue Jul 02, 2013 7:41 am

295 views and no opinions? Very odd for this group. I would take that as the analysis posted is sound and we are looking at a 5-15% drop in real estate prices by 2016... otherwise the math geeks would have unleashed themselves on this...
Investing is boring
 
Posts: 237
Joined: Tue Apr 09, 2013 12:55 pm

Re: Interest rates and home prices

Postby Rainier » Tue Jul 02, 2013 8:08 am

What if low rates kept everybody on the sidelines waiting for them to drop even lower. Now they are rising maybe people will be motivated to lock in and buy.
- Bill
User avatar
Rainier
 
Posts: 875
Joined: Thu Jun 14, 2012 6:59 am

Re: Interest rates and home prices

Postby Wagnerjb » Tue Jul 02, 2013 8:39 am

Economics 101 tells us that higher interest rates means less demand for single family housing. We don't need a study to tell us this.

Personally, I am in the process of building a home so I am very exposed to interest rates. The price of my new house will be driven by the price of lumber, steel, labor, etc. while the price of my existing house (which I will sell when the new house is finished in about 10 months) is sensitive to interest rates. So....I sure hope the study is correct on the delay in the reaction to interest rates :D
Andy
Wagnerjb
 
Posts: 6021
Joined: Mon Feb 19, 2007 9:44 pm
Location: Houston, Texas

Re: Interest rates and home prices

Postby Ketawa » Tue Jul 02, 2013 10:25 am

All else being equal, the relationship might hold. However, all else is never equal. Higher interest rates could mean a higher demand for credit to buy homes, which would push up the price of housing. Higher interest rates could also reflect higher inflation expectations, and a home is a real asset. On top of that, real estate is local and it's impossible to draw any conclusions about how the local market will react to aggregate changes.

I think the article was very selective. Even looking at the first graph, the 30-year rate drops pretty much monotically from 1982 to 2006. Yet there's a massive number of up and down spikes in the home price graph.

Why stop the analysis at 2006? Home prices continued plummeting while rates dropped, which hurts the article's thesis.
User avatar
Ketawa
 
Posts: 1054
Joined: Mon Aug 22, 2011 2:11 am
Location: Norfolk

Re: Interest rates and home prices

Postby MN Finance » Tue Jul 02, 2013 12:53 pm

There's no debate that rates influence home prices. But that influence is only w.r.t to otherwise expected prices. Meaning if home prices are expected to increase 5% per year for 3 years at current rates, then a rate increase depresses that by 15% in 2016, then prices will be nominally the same in 2016 as 2013 (for ex).
MN Finance
 
Posts: 1244
Joined: Sat Dec 22, 2012 11:46 am

Re: Interest rates and home prices

Postby IlliniDave » Tue Jul 02, 2013 1:08 pm

I've always figured that higher interest rates at minimum steer people into smaller houses if not act to suppress prices overall. Now that lenders are (hopefully) actually applying common sense to loan applications, it usually comes down to how big of a payment a borrower can prudently afford. Interest (and property taxes) I would think tend to limit loan amounts when they're relatively high.
Don't do something. Just stand there!
IlliniDave
 
Posts: 1368
Joined: Fri May 17, 2013 8:09 am

Re: Interest rates and home prices

Postby G-Money » Tue Jul 02, 2013 1:22 pm

Warning: I'm not a math whiz. I also only skimmed the linked article.

It looks like only the years 1972-2006 were studied. So not a big sample size. And even the author conceded that the R^2 was low. The author seemed to think that the correlation would be higher when inflation and/or nominal rates spike dramatically. But the number of times that happened in the 1972-2006 sample is very small. So my biggest criticism is that there probably isn't enough data to make any meaningful conclusions.

On the other hand, I agree with the common sense explanation of several posters here. If a buyer can only afford to pay $1,500/month, that buyer can't magically afford more or less than that depending on the percentage of that $1,500 is going to principal vs. interest.

I would think (no data or studies to support this theory) there would be a higher correlation between home prices and real interest rates, as opposed to nominal interest rates. If inflation rises, and nominal rates and wages rise in tandem with it, then I wouldn't expect house prices to fall. On the other hand, if real interest rates rise (i.e., nominal rates rising faster than inflation), I would expect house prices to fall.
Don't assume I know what I'm talking about.
User avatar
G-Money
 
Posts: 2835
Joined: Sun Dec 09, 2007 8:12 am

Re: Interest rates and home prices

Postby crumbgrabber » Tue Jul 02, 2013 1:34 pm

The Calculated Risk blog has had a few articles on this recently, and his conclusion was that there is not much correlation between rates and home prices. This is pretty counter-intuitive to me though.
crumbgrabber
 
Posts: 111
Joined: Fri Apr 30, 2010 8:28 am

Re: Interest rates and home prices

Postby rustymutt » Tue Jul 02, 2013 1:41 pm

Rainier wrote:What if low rates kept everybody on the sidelines waiting for them to drop even lower. Now they are rising maybe people will be motivated to lock in and buy.



What's bad for one group, is good for another group. Return to the mean in everything seems reasonable to me.
At the Very Least, Work Hard, Do Your Best, Know the Truth and the Facts and Always Be Honest!
User avatar
rustymutt
 
Posts: 2783
Joined: Sat Mar 07, 2009 1:03 pm


Return to Investing - Theory, News & General

Who is online

Users browsing this forum: ALinLI, Buddtholomew, Busting Myths, bvin, dswails2729, Epsilon Delta, Frugal Disciple, Ganacel, GTi and 102 guests