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Median House Price vs. Nominal Interest Rates (1980-2011)


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2012 Apr 18, 1:19pm   22,472 views  30 comments

by EconPete   ➕follow (2)   💰tip   ignore  

This data clearly shows the relationship between interest rates and home prices. The graph has an R squared of 0.8828 (excellent for a social science). From this information we can conclusively say that higher interest rates decrease the price of homes, and low interest rates increase the price of homes. Again, this shows that the Fed is propping up the prices of homes with unsustainable interest rates. As soon as interest rates return to normal, you can predict, from the trend line, what the corresponding decrease in home values will be.

Data from:
http://www.census.gov/const/uspricemon.pdf

http://www.freddiemac.com/pmms/pmms30.htm

#investing

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1   Philistine   2012 Apr 18, 2:39pm  

Why will rates "return to normal"? Would it be when everything else has already returned to normal, including home prices?

Mind the music, and your step, and with the girls be handy. . . .

2   thomas.wong1986   2012 Apr 18, 4:04pm  

and what would explain why prices fell as interest rates also fell... 1989 to mid 90s and than gain from 2008 to today...

it may not be a direct relationship...

but we certainly saw higher "speculation" as prices increased as rates went up...

3   tdeloco   2012 Apr 18, 5:33pm  

thomas.wong1986 says

and what would explain why prices fell as interest rates also fell... 1989 to mid 90s and than gain from 2008 to today...

Late 80's had a big recession: http://www.forbes.com/2008/01/18/stocks-1987-crash-pf-ii-in_dr_0118soapbox_inl.html

2008 to today have more to do with the government's measures to keep things afloat.

4   San Diego Renter   2012 Apr 18, 6:17pm  

Stuff like this makes it very tough to commit to buying a home.

5   delete this account   2012 Apr 18, 6:58pm  

That's hilarious. Rather than take away from the raw data that home prices tend to rise with the inflation rate, we get this a silly graph that only loosely works because you cherry pick the data that is on the referenced web pages to delete the 1970-1980 data.

Here, I've graphed the complete raw data from the supplied web pages.

My conclusion from your same referenced data: home prices tend to go up over time, typically smoothing over dips....

6   RentingForHalfTheCost   2012 Apr 18, 8:39pm  

fizbin says

My conclusion from your same referenced data: home prices tend to go up over time, typically smoothing over dips....

Hey, now your cherry picking. Your forgetting the data from 2012-2020 which clearly shows that the "home prices tend to go up over time" is old school thinking. Look what happened in 2016. The mortgage rate went negative for the first time ever, and the medium house priced still keep dropping. It wasn't until 2018 when the medium dipped under 50,000, that a stable base started to form. I think that was mainly because of all the Cupertino high school kids started entering the housing market putting upward pressure on the prices. ;)

7   tatupu70   2012 Apr 18, 10:08pm  

EconPete says

This data clearly shows the relationship between interest rates and home prices.

This is silly. You know that this isn't the case. The time period that should be most interesting to your theory is the late 70s to mid 80s when interest rates went from 9% to 18%. According to you, house prices should have absolutely tanked, losing are large percentage of their value.

What actually happened, of course, is that house prices gained ~30% over that period.

When you present a theory that you have develped over a certain time period, the best test for it is to find a completely different time period and see if it works for that period as well.

Fail.

8   CashWillCrash   2012 Apr 18, 10:31pm  

This is bogusness!

9   freak80   2012 Apr 18, 11:44pm  

The nominal interest rate is irrelevant. What matters is the REAL interest rate, which is the nominal rate minus the inflation rate.

My parents took out a mortgage in 1980 with some gawd-awful high (two digit) interest rate. But inflation was also very high (approacing two digits) at that time.

Annually, their debt was eroding away via inflation by about the same rate they were paying in interest.

10   innocent bystander   2012 Apr 19, 1:08am  

I'm sorry, your credibility just went into the dumpster. Science 101: correlation does not imply cause and effect.

11   RentingForHalfTheCost   2012 Apr 19, 1:31am  

innocent bystander says

I'm sorry, your credibility just went into the dumpster. Science 101: correlation does not imply cause and effect.

I'm half-way with you, the interest rate to housing price correlation has a wack of other factors that come into play. I do agree that if interest rates rise from here at this point in time it will force housing prices down. The question is really what would cause the interest rates to rise. A healthy housing market is one of the inputs, as well as the perception of future growth in GDP and overal economic health. So the interest rate are the effect and the health of the market is the cause, not the other way around. As long as we have an unhealthy housing market, interest rates will stay low IMHO. You also have to remember that any upward tick in rates also makes that hairy debt beast even angrier. Our revolving debt obligations are part of this massive problem. It is not as simple to plot two variables and declare correlation. They do track in small periods, but the real relationships are very complicated.

12   country_stroll   2012 Apr 19, 1:58am  

From the demand side, there are two main factors that drive a particular housing market: 1) how much money buyers have, and 2) how much money buyers can borrow. Since housing is a highly leveraged investment, the second factor predominates. This means that a particular buyer's earning power is multiplied by an interest rate factor thus resulting in that buyer's purchasing power. If the rates are low, the buyer can qualify for a larger loan. If the rates rise, then the buyer can qualify for less.

Another way to look at this is in terms of credit expansion or contraction. During the housing boom, credit, that is the total volume of dollars available borrowers, expanded dramatically thanks to lower credit score standards, lax underwriting (liar loans), and increase in allowable debt-to-income ratios -- not to mention negatively amortizing option ARM loan products. Artificially low interest rates a just the latest attempt to jack up borrower demand.

I don't think the stagflation environment seen the 1970s is a very persuasive counterargument to rising rates adversely impacting housing prices. The wage-price spiral then was due to the fact that many labor unions had contracts that automatically increased their wages with the consumer price index, or other inflationary measure. This was before the days of global labor arbitrage. Jobs simply don't have this protection, and will relocate abroad to preserve corporate solvency. The stagflation of the 70s finally ended when Paul Volcker raised the fed rates quickly enough to make all borrowing uneconomic. This caused two recessions in the early 80s.

As another commenter noted, the real interest rate is what matters. According to my father, the raises were great in the 1970s, 10+%/yr, you just couldn't buy anything with the money!

That said, the issue isn't how the rates compare to historical rates, the issue is where do rates go from here? And, how quickly do they rise? Two historical examples seem relevant: Post WWII USA, and Japan over the last two decades. Both were recovering from massive debt. Both recovery periods lasted more than 2 decades. The 30yfrm rates in the US varied from 4.35 to 5.09 percent from 1946 to 1956. Japanese mortgage rates have ranged between 2 and 4% since 1996, most recently at ~2.5%.

If the mortgage rates rise too quickly, they will choke off the housing recovery, and cause prices to fall. This happened in the mid-nineties in the US when rates rose from 6.83% in October 1992 to 9.2% in December 1994. It took three more years, and an Internet bubble before prices started to rise again.

I don't believe that it's necessarily inconceivable that rates may in fact remain low for the next decade. Consider that sovereign debts need to rolled over continuously. A higher debt servicing load will only cause more budgetary problems here and abroad. And, I don't know of many businesses that can make a convincing argument for borrowing at higher rates given increasing health care costs amidst decreasing revenues.

13   Shawn   2012 Apr 19, 4:00am  

fizbin says

BUT they really do mean that they are rich.

First off, owning a house doesn't make a person rich. During the bubble a lot of people liked to think that it did, and that they could perpetually take out HELOCs to tap into that wealth, but that's not the way it works. Owning a home means that they no longer have to pay rent or interest to a bank. They could sell the home and take the cash, but what would they get, a few hundred grand? Far from rich. And then they'd be back to paying rent again.

Second, there's no "viola", 100% stake. It doesn't work that way. You have to pay your mortgage for 30 years. If your mortgage interest costs more than renting and the house value performs worse than the value of the assets you could have invested in had you rented, than you'll do worse by buying. Of course, there are two big "IFs" in that statement, and a tool like Patrick's calculator can help you evaluate those variables.

14   delete this account   2012 Apr 19, 4:55am  

Shawn says

First off, owning a house doesn't make a person rich.

No need to be quite so literal. I was speaking metaphorically. In this case, one could control their own destiny and help themselves along to a happy stressful futures by owning their home free and clear of a mortgage. You're right, if you squander that by taking all that value back out to get yourself a depreciating asset like a car or a kitchen, then all bets are off. I don't spend a lot of time dwelling on those that do cuz the idea is not my mindset.

Shawn says

Second, there's no "viola", 100% stake. It doesn't work that way. You have to pay your mortgage for 30 years.

Again, yes. But the specific example used a person who bought the house in 1980. As anybody knows who lived through that period, both home values and rents went up during that period. If you bought in 1980, you might have had net negative cash flow for a year or three relative to renting when you were starting out, but five years out, you were clearly ahead of the game. And 25 years out, you were chuckling at your good fortune as you wrote a mortgage payment that was like 1/10th what your renting neighbor was paying. And after 30 years, you weren't sending a check at all.

Patrick's calculator is cute, but it's only as good as the assumptions that it uses. His default assumption that can only be changed for those of you that are a member of his service is that nominal home prices are going to decline 1% each and every year for the duration of home ownership. Think about that, he isn't saying they are going decline relative to purchasing power, he's saying that 10 years from now absolute home prices are going to be less than they are today, after we've already had five years of declines. So he believes that he has so much insight into the future that he can with high confidence predict a 15 year decline in pricing, something that has never before happened in the history of the US. And as so many others have pointed out, he's a relative moderate on this site.

But here's the thing, I've had this discussion before. Before the internet, there was a thing called usenet. A cooperative infrastructure of interconnected unix machines would call each other up, and pass along messages in each of the many approved discussion groups. Today, google has purchased and archived a great deal of that content into its google group. Anyway, back in 1990 there was a local BA software developer who totally was on the bay area prices are out of whack, everybody is going leave, california economy is going to dry up wagon. Every week for 4 years, he submitted his weekly report entitled something like real-estate news to misc.invest.real-estate that detailed how bad the foreclosure inventory was, how too few people could buy to support prices, etc.

I went back and looked at the old arguments from then, and man it's like history repeats itself on patrick.net.

Anyway, I'm not on here flogging real estate as the be all end all. I actually hope that prices don't go up for now since I am looking to move down from a house that is just too big for me and our family (I'm on 7.5 acres with a nice bay view). There is no inventory where I want to move to, so I'm currently stalemated....

15   thomas.wong1986   2012 Apr 19, 5:30am  

It is difficult to correlate home prices and interest rates.

16   freak80   2012 Apr 19, 5:31am  

It can still be better to rent than buy, like when you lose less $ per month on rent than mortgage interest, property taxes, maintenance, and insurance.

Speculation on future house price appreciation/depreciation is just that: speculation. Nobody knows where the market is going.

17   thomas.wong1986   2012 Apr 19, 5:33am  

fizbin says

Again, yes. But the specific example used a person who bought the house in 1980. As anybody knows who lived through that period, both home values and rents went up during that period. If you bought in 1980, you might have had net negative cash flow for a year or three relative to renting when you were starting out, but five years out, you were clearly ahead of the game. And 25 years out, you were chuckling at your good fortune as you wrote a mortgage payment that was like 1/10th what your renting neighbor was paying. And after 30 years, you weren't sending a check at all.

That is why we had a mania, long before the lowering of interest rates, RE was a NO LOSE proposition... Always goes up and then it went to the ultimate extreme with prices. There is no way to compare what we had today with what went on in the 70s or 80s.

18   swebb   2012 Apr 19, 5:49am  

EconPete says

This data clearly shows the relationship between interest rates and home prices.

Can you do a graph showing the correlation between interest rate and year? I think you would also find that home prices are highly correlated with the year (later years tending to have higher home prices), so it's not clear that the interest rate and price correlation implies causation...maybe it's just that house prices increase with time due to inflation.

Maybe make your median house price in real terms, and also normalize for the same type of house (square footage, at least).

?

19   Shawn   2012 Apr 19, 5:52am  

fizbin says

Patrick's calculator is cute, but it's only as good as the assumptions that it uses. His default assumption that can only be changed for those of you that are a member of his service is that nominal home prices are going to decline 1% each and every year for the duration of home ownership.

You might want to check that again. Last time I played with the calculator I was able check the affects of different levels of appreciation/depreciation.

But my main point was that there is value in making these types of assessments as you wait for the right opportunity to buy. It's wrong to just assume that because buying was the best long term option for people in the 80s that it is the best long term option now. Or that because it looks like a bad option for people in bubble areas in California that it's also a bad for someone in Texas. You seem quick to just dismiss the calculator and advise people not to worry, things will just work out in the end.

20   tdeloco   2012 Apr 19, 12:03pm  

Shawn says

It's wrong to just assume that because buying was the best long term option for people in the 80s that it is the best long term option now.

Good point. Real income began to dip in the 80's:

This is consistent with the Case-Shiller dip in 89-97:

So my question is, where is real income going? Consider the following article:

http://www.npr.org/2011/04/10/135272006/paychecks-cant-keep-up-with-rising-prices

21   kutta   2012 Apr 19, 6:07pm  

fizbin says

True enough on the nominal vs real term, BUT they really do mean that they are rich. Depending upon where they lived, they put 20% down on the house and had PITI - tax deduction that was less than renting (and diverged for the entirety of that time).

Viola, 30 years later, their 20% stake in the house had turned into a 100% stake, and in their final 10 years, they were paying a minority fraction of living expense of an equivalent renter.

Of course if they used Patrick's default rent vs buy calculator they concluded that their house was going to be nominally half the value rather than double the value, so they didn't buy in the first place.

X amount of money put in Nasdaq index ( stock market) in 1980 would have become 23 times X by now.

example:

if it was 100k home in 1980.You had to pay 20K for that.
If you took that 20K and had invested in stock index like nasdaq index, it would have become 20 K* 23 = 460K by now.

always look at opportunity cost of money paid upfront.There is a good reason why savvy investors use math to assist in good financial decisions.

for you to buy a home.
1) monthly mortgage "interest" payment should be lower than renting the same place.
2) Rent - mortgage interest ( +ve cash flow) should offset the opportunity cost of 20% down and monthly principal payments.

22   NDrLoR   2012 Apr 20, 1:50am  

Those charts look like kites caught in power lines!

23   curious2   2012 Apr 20, 1:16pm  

[...]

24   tts   2012 Apr 22, 1:27am  

Philistine says

Why will rates "return to normal"?

Because its impossible for the FED to follow a ZIRP forever.

When will the FED be forced to raise rates? No one knows for sure but they'll be able to keep it up for as long as the rest of the world economy is in the crapper while other governments continue with competitive devaluation.

25   bubblesitter   2012 Apr 22, 4:31am  

tts says

Because its impossible for the FED to follow a ZIRP forever.

Not forever but 15 to 20 years is still a long time for some people here. What I realized is it is not fun caught up in the historical bubble right after you are trying to make a living after college. :)

26   thomas.wong1986   2012 Apr 22, 6:34am  

curious2 says

A stated reason for federal involvement in mortgage lending was to facilitate long term financing and prevent the forced sales of the depression destabilizing the market. Another reason may have been to encourage people to put their $ into something "safe as houses" instead of speculating on Wall Street. Alas the road to hell is paved with good intentions, and we now see a FIRE economy

LOL! and another reason why Govt needs to stop the social engineering.

27   tts   2012 Apr 22, 5:33pm  

bubblesitter says

Not forever but 15 to 20 years is still a long time for some people here.

I don't think the rest of the world will be the crapper for that long. The EU is getting close to its limit but we already know Portugal, Spain, and Italy are likely to develop problems similar to what Greece is going through right now.

I think we might see a resolution to the ZIRP issue over the next few years.

28   ELC   2012 Sep 12, 11:51am  

tatupu70 says

The time period that should be most interesting to your theory is the late 70s to mid 80s when interest rates went from 9% to 18%. According to you, house prices should have absolutely tanked, losing are large percentage of their value.

Interest rates effect the payment which effects affordability. If wages stayed the same and the prices went up how could people afford the payment at 18%. Something must have been in play to make the payment affordable.

My parents bought a condo on the ocean in FL for $55,000 in cash in 1975. I sold it last year for $285,999 (No Realtor commission. Never updated anything.). At it's peak the highest someone ever sold in the building was $475,000. Did I make a mistake?

29   ELC   2012 Sep 12, 10:57pm  

APOCALYPSEFUCK is Shostakovich says

The year after that, whoever is living in it will be shooting at the neonazi cannibals climbing in through the windows.

It's on the 16th floor so they better be tall. But throwing ice at the elderly beach canibals. Now that's just good fun! :)

30   tatupu70   2012 Sep 12, 11:05pm  

ELC says

If wages stayed the same and the prices went up how could people afford the payment at 18%.

Of course. But interest rates don't change in a vacuum. There is a very well established trend of wages and interest rates moving in tandem. And home prices depend MUCH more strongly on wages and much less on interest rates.

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