patrick.net

That's just it: when mortgage rates go down, prices go up. And visa versa.

People buy what they can afford.

There's no free lunch.

So, Bernanke promised low/zero interest until 2014. Is it looking like there is going to be too much upward pressure on rates for him to make good on that? Am I confusing two different things here?

I certainly hope so, because I sure miss getting 5% APY on my chunk of cash in savings. The current 0.8% definitely isn't great.

bmwman91 says

I certainly hope so, because I sure miss getting 5% APY on my chunk of cash in savings. The current 0.8% definitely isn't great.

Yup. And we wonder why Americans aren't saving their money.

wthrfrk80 says

That's just it: when mortgage rates go down, prices go up. And visa versa.

History disagrees with you.

tatupu70 says

History disagrees with you.

Yeah, that is one interesting part. Simple logic would dictate that higher interest rates =less borrowing power = lower prices. However, there seem to be other factors at work, and it has been shown on here a couple of times that higher interest rates do sometimes = higher house prices.

The other mistake that many people make in here is the application of blanket statements. The Bay Area is a niche market, with niches even within itself. Thanks to an abundance of high-earners and immigrants, things around here don't exactly trend tightly with nation-wide RE statistics. Will higher interest rates lead to higher prices everywhere? I don't know.

Much of the nation (flyover land) has probably bottomed. The BA seems to have bottomed at a high level, and many buyers have to stretch themselves to the limit to buy a house as it is. Higher interest rates just might push prices in some parts of the BA down since you either need a heap of cash, or a 3.5% down loan to buy there. RE is very local, and everyone here is focused on a specific niche area. So, who knows what increased interest rates will do here?

It wouldn't surprise me if higher interest rates caused higher prices in the BA though, because I am convinced that the BA just isn't a place for middle class, or even upper middle class, folks to live if they ever want to retire. The cost of getting into a house here, without a long commute, makes saving for retirement a pipe dream. You either need wealthy parents or an IPO to get the cash together for it without tossing away your whole retirement nut.

Well, we did hit some new lows in mortgage rates, and home prices were still falling, is that the history you are talking about?

I'm guessing the reversal is in conjunction with the most recent "called" bottom, and so maybe rates can moderate some again. With credit cards they say, oh the rate is high because of defaults.

Maybe they can push that theory with housing.

I think that the general "history" that tatupu mentions is that higher interest rates come with higher-performing investments, which give people a bigger source of cash to draw from, and therefore increased borrowing/spending power.

Ok, so maybe I'm wrong.

Remember I'm talking about REAL interest rates. Real interest rate = nominal interest rate minus inflation rate.

Interest rates were through the roof in 1980. But so was inflation. What was the REAL interest rate in 1980?

bmwman91 says

I think that the general "history" that tatupu mentions is that higher interest rates come with higher-performing investments, which give people a bigger source of cash to draw from, and therefore increased borrowing/spending power

Yes--I won't pretend to have all the answers for why there is very little correlation between interest rates and home prices, but there really isn't much correlation there.

My guess would be that high interest rates usually happen in high growth/high inflation times. I think home prices probably have a better correlation with average household wages.

wthrfrk80 says

Remember I'm talking about REAL interest rates. Real interest rate = nominal interest rate minus inflation rate.

How could I remember it--did you ever mention it? But I'd agree that if mortgage rates go up without corresponding wage gains, it would be bad for housing. I don't think that will happen, however.

I am not sure what it was in 1980. My parents bought a house with a 16% APR mortgage in 1981, and according to the interwebs, inflation was around 10% at the time. So, a real interest rate of ~6% was the case in 1981? They said that housing prices were on the rise in the Bay Area since the high tech economy was expanding, and everyone was freaking out with a "OMG buy now or we will never afford a house" mentality. My dad wanted a workshop/garage, and they were planning to have me in a few years (1984), so they bought too.

My father was pretty pissed when he started the buying process. The points and fees system really had him mad, and he wanted to just walk out of the bank because he felt like he was knowingly letting himself be robbed (which actually is the case). So, nothing has changed since then lol. They bought anyway at 3.1x their combined income, for a whopping $105k for a tract house in Cambrian/Robertsville. Both were working in high tech at the time. They have been there ever since, my mom quit working when I was born, they added a 2nd story, and will be debt-free in about 4 years. They could pay it off now, but after refinancing, the money does more good in their retirement accounts.

tatupu70 says

My guess would be that high interest rates usually happen in high growth/high inflation times. I think home prices probably have a better correlation with average household wages.

Agreed. I think that this is why we are seeing flat, or slowly declining prices right now.

tatupu70 says

How could I remember it--did you ever mention it? But I'd agree that if mortgage rates go up without corresponding wage gains, it would be bad for housing. I don't think that will happen, however.

This is most definitely the case. ZIRP has been the answer to keeping the RE industry afloat despite the fact that Americans are widely unemployed/underemployed and wages are not rising overall. If rates rise an appreciable amount any time soon, it would probably crush housing. Our economy has some fundamental issues, and they are not being addressed.

Again though, the Bay Area is still pretty full of money. There are far more wealthy people here and abroad than decent houses on the market. Add to that a few thousand lucky folks that are sitting on IPO-related money (or will be soon), and the Bay Area will probably continue to do "its own thing" independent of the rest of the nation. It is going to become a mix of affluent SFH neighborhoods for those with deep pockets, and shitty high density housing for everyone else (poor people all the way to $300k household income upper middle class folks). That is my gloomy opinion anyway, and I have more or less told myself to accept it so that I can stop wasting time thinking about a house.

Historically (from a national average price point of view), we haven't experienced a housing boom/bust like this since 70's and the mortagage rate (30 yr fix) was mostly above 7%. Therefore, I would hesitate to use historical data to dispute or support OP's oppinion. But I will keep beating the drum and say it's about your job security. That said, I can happily buy a house today if I am to stick around for another 10-15 years.

The REAL interest rate is the only one that matters. Example: don't think you're getting a good deal on your savings with a 10% interest rate if the inflation rate is 15%! That's why I didn't mention the real interest rate specifically.

The Bay Area is probably not a representative sample. Anything can happen to local markets.

I'm was mainly making an "all other things equal" argument. Obviously if oil is discovered in Your Town, or if a bunch of high tech companies (with high earners) move in, Your Town's RE market will go crazy.

bmwman91 says

Again though, the Bay Area is still pretty full of money.

But only the "shack" houses in good school districts which are still keeping up. This is because they are not really the 1%ers who are buying them. These are just regular folk taking advantage of the FHA 3.5% interest rate and investors who think that they will be buyers down the road. High end housing, even in excellent school districts has taken a beating. That's because the 1%'ers aren't as stupid as the 99%'ers and they don't overpay for their houses. Once the FHA is bankrupt, the 3.5% free lunch is going away, and the fortress will buckle.

wthrfrk80 says

Yup. And we wonder why Americans aren't saving their money.

Because they are never taught to save for rainy day! Just go on debt loading spree and time machine will take care of the rest. God bless America!

bmwman91 says

How could I remember it--did you ever mention it? But I'd agree that if mortgage rates go up without corresponding wage gains, it would be bad for housing. I don't think that will happen, however.

This is most definitely the case. ZIRP has been the answer to keeping the RE industry afloat despite the fact that Americans are widely unemployed/underemployed and wages are not rising overall. If rates rise an appreciable amount any time soon, it would probably crush housing.

I think our political and bankster overlords have shown recently that they have some small tolerance for higher rates even if that may lead to lower prices. Mortgage rates are up a little, and not so long ago FHA increased their fees a bit without being challenged. You could easily imagine support being withdrawn this way slowly for years to come. It is difficult for me to imagine a big step increase in interest rate or sudden withdrawal of all FHA support.

dunnross says

That's because the 1%'ers aren't as stupid as the 99%'ers and they don't overpay for their houses

Tell me a single 1% that sold their home in the last 6 years that didn't lose money. They ALL over-paid... Spielberg just lost a 1.5 million on his home.

I finally understand what QE3 means (Quantitative Easing)... it was described as the FED going to the computer and opening up BenFranklin100.doc, and printing 100 Billion copies to the printer!

they adjust rates UP then DOWN to get maximum churn on the homebuyers and refis. Todays buyer at 'high rates' will be the refi person in 6 months if they decide to lower rates. THen when refi activity slows down they raise rates and all those 'high rate buyers' are future REFIs they can extract more fees/points from when they again lower rates in 6 months.

Its an awsome racket for the banks/fed!

And this! Bastardous B of A is going to rent out it's foreclosures.

http://economywatch.msnbc.msn.com/_news/2012/03/23/10829814-bank-of-america-renter-program-could-help-its-bottom-line

Again, agree, only a matter of time before time runs out...

David9 says

Again, agree, only a matter of time before time runs out...

Banks are in denial as well.