patrick.net

ch_tah says

The point is that anyone arguing that rates going up means prices will go down is using weak logic.

whoah, hold on there tex.

Nobody can deny that, ceteris paribus, rates going up will push home prices down.

There was a very strong correlation in 2002 (with the fall of mortgage rates) a rise in home valuations.

The question is about the ceteris paribus part. I totally agree that we shouldn't expect rates to rise in anything but response to burgeoning wage inflation, since the Fed has historically pushed up rates to cool off the housing market (late 1970s, late 1980s, late 1990s, 2006-2007).

But I do think it's possible for the Fed to lose control of rates and find mortgage rates decoupled from its policy levers. I don't know enough about these levers to say why or how, but discounting this as "impossible" doesn't seem "logical". Everybody to the right of Barney Frank is demonizing the Fed these days, maybe they'll just say 'fine, have fun guys -- we'll be at Vail if & when you change your minds this month'.

tatupu70 says

mike4518 says

eyeballing the chart indicates the two variables are negatively correlated.

I think you need your eyeballs checked.
gameisrigged says

Yes, you can cherry-pick 2 points on the graph and thus make it appear, in those limited parameters, as though the two factors are not inversely proportional, as Taintpud70 has done

Cherry pick? Come on. Cherry picking would be looking at 1975 - 1979. Or 1986 - 1989. Or 1989 - 1994.

Oh, O.K. - You picked 1950, which happens to be a year when prices were lower, even though in 1955 prices fell FOR AN ENTIRE DECADE. Oh, no, there sure isn't any cherry picking going on there, no siree.

I really fail to see how anyone could reasonably say there is a negative correlation between those two charts.

I fail to see how anyone could NOT. Unless they're grasping at straws trying to justify a permabull philosophy.

I’ll say again–if there is any correlation at all there, it is VERY weak. It is obviously strongly outweighed by other factors–such as wage inflation.

I think we already established that it's not a 100% correlation, and I specifically said that it appears to be outweighed by other factors at times. We also established that if two things are not 100% correlated, that does not imply that they are not correlated AT ALL.

Finally–I’m assuming that the home price index is inflation adjusted. We should really be using nominal home values–not inflation adjusted.

Why? I would say precisely the opposite. The unadjusted numbers would always go up over time as the value of currency diminishes, telling us nothing.

Nomograph says

APOCALYPSEFUCK says

We’re so fucked, we’re gonna wake up tomorrow with our assholes between our eyes!

Isn’t that called a Dirty Sanchez or something?

I think it's more like a Cleveland Steamer, or a Rusty Trombone.

here's the post with the price to rate chart:
http://seattlebubble.com/blog/2010/02/09/do-rising-interest-rates-lead-to-falling-home-prices/

the raw data for the chart is from robert shiller's website:
http://www.irrationalexuberance.com/

raw interest rate data:
http://www.econ.yale.edu/~shiller/data/ie_data.xls
raw home price data:
http://www.econ.yale.edu/~shiller/data/Fig2-1.xls
how to calculate the correlation coefficient (or just use excel's correlation function; not sure if you need the stats package install):
http://en.wikipedia.org/wiki/Correlation_and_dependence

if anyone wants to know the actual answer, instead of yelling at each other and throwing out fuzzy unconvincing arguments, just run the calculation. i'm too lazy and don't care enough to actually do the calculation.

gameisrigged says

Why? I would say precisely the opposite. The unadjusted numbers would always go up over time as the value of currency diminishes, telling us nothing

The unadjusted numbers would go up more significantly during inflationary times which would also most likely coincide with high interest rates.

tatupu70 says

gameisrigged says

Why? I would say precisely the opposite. The unadjusted numbers would always go up over time as the value of currency diminishes, telling us nothing

The unadjusted numbers would go up more significantly during inflationary times which would also most likely coincide with high interest rates.

Yes, things cost more when there's inflation. By definition. That's why you adjust for it, so you know what the REAL cost is. There's no point in using unadjusted home prices, unless you are going for a disingenuous way to "prove" your belief that there's no correlation with interest rates.

gameisrigged says

Yes, things cost more when there’s inflation. By definition. That’s why you adjust for it, so you know what the REAL cost is. There’s no point in using unadjusted home prices, unless you are going for a disingenuous way to “prove” your belief that there’s no correlation with interest rates.

Actually, that's the only way to look at it. Think about it for a second. Say inflation picks up and rents and home prices double in 10 years (just keeping up with inflation). Would you rather have owned or rented during this time? Of course you would have rather owned.

When you buy a house you must pay for it in nominal dollars, not real dollars. Adjusting for inflation is basically adjusting out the reason why interest rates and prices seem to move together at some points in history.

gameisrigged says

That’s why you adjust for it, so you know what the REAL cost is.

The REAL cost in this case is nominal dollars. If you disagree, I challenge you to pay someone in 1970 dollars. Tell me how that goes.

Troy says

ch_tah says

The point is that anyone arguing that rates going up means prices will go down is using weak logic.

whoah, hold on there tex.
Nobody can deny that, ceteris paribus, rates going up will push home prices down.
There was a very strong correlation in 2002 (with the fall of mortgage rates) a rise in home valuations.
The question is about the ceteris paribus part. I totally agree that we shouldn’t expect rates to rise in anything but response to burgeoning wage inflation, since the Fed has historically pushed up rates to cool off the housing market (late 1970s, late 1980s, late 1990s, 2006-2007).
But I do think it’s possible for the Fed to lose control of rates and find mortgage rates decoupled from its policy levers. I don’t know enough about these levers to say why or how, but discounting this as “impossible” doesn’t seem “logical”. Everybody to the right of Barney Frank is demonizing the Fed these days, maybe they’ll just say ‘fine, have fun guys — we’ll be at Vail if & when you change your minds this month’.

I thought people were talking about reality not vacuums. The chart used above shows no correlation. Yes, if your hypothetical occurs, things "will be different this time." I thought most people were against using that logic though.

Even the "strong correlation" in 2002 isn't necessarily strong. Loose lending may have been the prime driver for price increases not rate declines. If a mortgage company doesn't bother to check income levels and use sneaky teaser rates, anyone can afford anything.

I keep looking for the chart that guarantees the future.

Phenoms ;

We drive 73 mph, no matter the posted speed limit.
We do not pay over 14 % mortgage
We do not drive over 50 minutes to or from work
We pay 2.5 times our annual income on our homes. The bubble took us up to 8 times.

We made a bunch of money introducing the computer. We spent a bunch of money on Real Estate. Now what ?

tatupu70 says

gameisrigged says

Yes, things cost more when there’s inflation. By definition. That’s why you adjust for it, so you know what the REAL cost is. There’s no point in using unadjusted home prices, unless you are going for a disingenuous way to “prove” your belief that there’s no correlation with interest rates.

Actually, that’s the only way to look at it. Think about it for a second. Say inflation picks up and rents and home prices double in 10 years (just keeping up with inflation). Would you rather have owned or rented during this time? Of course you would have rather owned.

That's an utter non-sequitur. We weren't discussing whether you would have "rather rented or owned"; we were simply discussing whether there is a correlation between interest rates and home prices.

gameisrigged says

That’s why you adjust for it, so you know what the REAL cost is.

The REAL cost in this case is nominal dollars. If you disagree, I challenge you to pay someone in 1970 dollars. Tell me how that goes.

You only prove my point. One cannot pay for something today in 1970 dollars, because inflation exists. Therefore, if you want to look at prices over time and be able to say anything meaningful about them other than that they went up, you have to adjust them for inflation. I'm not sure what you're having trouble understanding here.

ch_tah says

Even the “strong correlation” in 2002 isn’t necessarily strong. Loose lending may have been the prime driver for price increases not rate declines. If a mortgage company doesn’t bother to check income levels and use sneaky teaser rates, anyone can afford anything.

You are confusing correlation with causation. The former does not necessarily imply the latter. If you want to discuss WHY interest rates are inversely proportional to home prices, you can start such a discussion. But the statement was made here that they are NOT inversely proportional, period, and that is false.

gameisrigged says

That’s an utter non-sequitur. We weren’t discussing whether you would have “rather rented or owned”; we were simply discussing whether there is a correlation between interest rates and home prices.

No, actually we were talking about whether it's more appropriate to use nominal or real housing prices. Try to keep up. And for that discussion, it's completely relevant.

gameisrigged says

You only prove my point. One cannot pay for something today in 1970 dollars, because inflation exists. Therefore, if you want to look at prices over time and be able to say anything meaningful about them other than that they went up, you have to adjust them for inflation. I’m not sure what you’re having trouble understanding here

Wait a second. I thought you and others were arguing that when interest rates rise, nominal housing prices will fall. Is that not what you believe?

tatupu70 says

gameisrigged says

That’s an utter non-sequitur. We weren’t discussing whether you would have “rather rented or owned”; we were simply discussing whether there is a correlation between interest rates and home prices.

No, actually we were talking about whether it’s more appropriate to use nominal or real housing prices. Try to keep up. And for that discussion, it’s completely relevant.

Uhm, no. Here's a clue, dipshit - If you are going to respond to ME and take issue with what I posted, then take 1/2 a second to actually READ what I wrote. Don't answer the imaginary voices in your head.

gameisrigged says

You only prove my point. One cannot pay for something today in 1970 dollars, because inflation exists. Therefore, if you want to look at prices over time and be able to say anything meaningful about them other than that they went up, you have to adjust them for inflation. I’m not sure what you’re having trouble understanding here

Wait a second. I thought you and others were arguing that when interest rates rise, nominal housing prices will fall. Is that not what you believe?

I am arguing that interest rates appear to be inversely proportional to housing prices. I made no other claims as to what I "believe".

gameisrigged says

Uhm, no. Here’s a clue, dipshit - If you are going to respond to ME and take issue with what I posted, then take 1/2 a second to actually READ what I wrote. Don’t answer the imaginary voices in your head

Wow. dipshit? Calm down there buddy. Well, here's what you wrote:

gameisrigged says

Yes, things cost more when there’s inflation. By definition. That’s why you adjust for it, so you know what the REAL cost is. There’s no point in using unadjusted home prices, unless you are going for a disingenuous way to “prove” your belief that there’s no correlation with interest rates.

Does that refresh your memory? Sure looks to me like you were talking about real vs. nominal prices. Do you disagree??

gameisrigged says

I am arguing that interest rates appear to be inversely proportional to housing prices. I made no other claims as to what I “believe”.

Again. You're previous post tells a different story.

gameisrigged says

There’s no point in using unadjusted home prices, unless you are going for a disingenuous way to “prove” your belief that there’s no correlation with interest rates

Paraphrasing--seems like you are saying that you "believe" real home prices should be used. Which is completely idiotic.

Look--I don't know how much more clearly I can make it. The premise that many here espouse is that home prices will fall when interest rates rise. And that's a reason why you shouldn't buy now. This is clearly refering to nominal home prices and not real prices. Do you agree with that statement?

tatupu70 says

Wow. dipshit? Calm down there buddy.

Dude, don't make assholic comments like, "Try to keep up", and then get your panties in a bunch when I respond in kind. You reap what you sow. If you are polite to me, I will be polite to you. If you act like a cock, then expect others to treat you in a similar fashion. It's not rocket science.

Well, here’s what you wrote:
gameisrigged says

Yes, things cost more when there’s inflation. By definition. That’s why you adjust for it, so you know what the REAL cost is. There’s no point in using unadjusted home prices, unless you are going for a disingenuous way to “prove” your belief that there’s no correlation with interest rates.

Does that refresh your memory? Sure looks to me like you were talking about real vs. nominal prices. Do you disagree??

Um, no. Since I have ALWAYS been referring to prices that are adjusted for inflation, why would I deny it?

gameisrigged says

I am arguing that interest rates appear to be inversely proportional to housing prices. I made no other claims as to what I “believe”.

Again. You’re previous post tells a different story.

You're hitting the crack pipe a little too hard, there. My previous post does not "tell a different story". What on earth are you talking about? Interest rates are inversely proportional to housing prices. Why are you having so much trouble with that? It's quite a straightforward concept.

gameisrigged says

There’s no point in using unadjusted home prices, unless you are going for a disingenuous way to “prove” your belief that there’s no correlation with interest rates

Paraphrasing–seems like you are saying that you “believe” real home prices should be used. Which is completely idiotic.

You already said you believe unadjusted prices should be used, but that makes absolutely no sense, and I explained why. Saying I'm "idiotic" does nothing to convince me of your claim.

I don't understand why you are making this so complicated. Look at the chart I posted. Does it not appear that interest rates are, for the most part, inversely proportional to home prices? Have I made any OTHER claim in this thread? Anything you post here that does not refer to my claim that interest rates are inversely proportional to home prices is a red herring.

Look fellows. Here is a chart that includes nominal home prices.

The distinguishing feature is that, until the current downturn, prices NEVER GO DOWN. That is because there is a thing called "inflation". REAL prices DO go down. Nominal prices do not. The current downturn in nominal prices is a singular event, and it would be ridiculous to try to form a general rule on the basis of a single event.

So I ask you, please tell me how it makes any kind of sense, if one is attempting to discern the relationship between interest rates and prices, to look at nominal prices which ONLY GO IN ONE DIRECTION? That's just stupid.

gameisrigged says

I am arguing that interest rates appear to be inversely proportional to housing prices. I made no other claims as to what I “believe”.

Dude--you are all over the place. I stated in a previous post that you shouldn't use inflation adjusted prices and you seemed to disagree. So, I posted why it is correct to use them and you seemed to disagree and posted it. Then when I responded to that post, you claimed that all you were talking about is the correlation between interest rates are real home prices. Whatever.

I still maintain, as I always have, that historically there has been little to no correlation between interest rates and nominal home prices. I can't tell if you agree or disagree with that statement.

gameisrigged says

I don’t understand why you are making this so complicated. Look at the chart I posted. Does it not appear that interest rates are, for the most part, inversely proportional to home prices?

No.

gameisrigged says

The distinguishing feature is that, until the current downturn, prices NEVER GO DOWN

Ray--I know you've been looking for Larry Yun. He may have turned up here....

gameisrigged says

So I ask you, please tell me how it makes any kind of sense, if one is attempting to discern the relationship between interest rates and prices, to look at nominal prices which ONLY GO IN ONE DIRECTION? That’s just stupid

Here's why. A couple of reasons

1. Because many people (not sure if you agree, because you didn't answer my earlier question) believe that as soon as interest rates rise, nominal home prices will fall.

2. Further, if you are considering purchasing a home and doing a rent vs. buy calculation the nominal house price is infinitely more important than the real home prices. When you own, you are protected against housing inflation. Looking only at real prices neglects this.

tatupu70 says

gameisrigged says

I am arguing that interest rates appear to be inversely proportional to housing prices. I made no other claims as to what I “believe”.

Dude–you are all over the place. I stated in a previous post that you shouldn’t use inflation adjusted prices and you seemed to disagree. So, I posted why it is correct to use them and you seemed to disagree and posted it. Then when I responded to that post, you claimed that all you were talking about is the correlation between interest rates are real home prices. Whatever.

I have consistently said the same thing over and over, and you keep bombarding me with non-sequiturs and red herrings. Yeah, *I'm* the one who's all over the place. Suuure......

I still maintain, as I always have, that historically there has been little to no correlation between interest rates and nominal home prices. I can’t tell if you agree or disagree with that statement.

For the umpteenth time, nominal home prices almost never go down. The current downturn in nominal home prices is an aberration. IT MAKES NO SENSE to examine nominal prices if you are trying to determine the relationship between interest rates and home prices. That would be like jumping out of an airplane with two balloons in your hands and trying to determine which balloon has more helium in it. There's nothing to agree or disagree with, because your comparison makes no sense.

tatupu70 says

gameisrigged says

I don’t understand why you are making this so complicated. Look at the chart I posted. Does it not appear that interest rates are, for the most part, inversely proportional to home prices?

No.

I disagree.

gameisrigged says

The distinguishing feature is that, until the current downturn, prices NEVER GO DOWN

Ray–I know you’ve been looking for Larry Yun. He may have turned up here….

You know, I've been wondering if you are mentally retarded. Now I'm pretty sure you are. Look at the chart of nominal home prices I posted. Before, the current downturn, please tell me where nominal prices ever go down on that chart other than tiny blips lasting a month or two. Oh, they don't? Duh.

gameisrigged says

So I ask you, please tell me how it makes any kind of sense, if one is attempting to discern the relationship between interest rates and prices, to look at nominal prices which ONLY GO IN ONE DIRECTION? That’s just stupid

Here’s why. A couple of reasons
1. Because many people (not sure if you agree, because you didn’t answer my earlier question) believe that as soon as interest rates rise, nominal home prices will fall.
2. Further, if you are considering purchasing a home and doing a rent vs. buy calculation the nominal house price is infinitely more important than the real home prices. When you own, you are protected against housing inflation. Looking only at real prices neglects this.

Dude, you are seriously obtuse as hell. You obviously are never going to understand what I am telling you, so maybe you should just forget about it.

OK--I give. Either I'm not doing a good job explaining my point or you're just not listening. In any event, it's no use to continue rehashing the same stuff...

Cheers.

tatupu70 says

I still maintain, as I always have, that historically there has been little to no correlation between interest rates and nominal home prices. I can’t tell if you agree or disagree with that statement.

Given that rate changes over a very long period of time will make changes in nominal prices obfuscated by inflation, your observation is pointless.

klarek says

Given that rate changes over a very long period of time will make changes in nominal prices obfuscated by inflation, your observation is pointless

My observation is pointless??? That is my point! That home prices depend on wage inflation and that interest rate changes are pretty much meaningless. And that all of the posters on here who continue to write that when mortgage rates rise, prices are sure to fall are wrong.

tatupu70 says

My observation is pointless??? That is my point! That home prices depend on wage inflation and that interest rate changes are pretty much meaningless. And that all of the posters on here who continue to write that when mortgage rates rise, prices are sure to fall are wrong.

They're not necessarily wrong. If rates rise significantly, the downward pressure on housing prices could be greater than the upward pressure from GDP/inflation growth. Even if not, in real dollars those houses will drop in price. Whether it's nominal or real, the impact will be the same. I was pointing out that by looking at it only from the view of nominal dollars and thus concluding that changes in rates don't effect prices (or so you seem to be implying) is flatly wrong.

klarek says

If rates rise significantly, the downward pressure on housing prices could be greater than the upward pressure from GDP/inflation growth.

Yes, and if aliens land on earth tomorrow and hand out free jelly beans to all, then housing prices might rise. OK--once more. If you believe history is any guide, then your above statement has been shown to be utterly false.

klarek says

I was pointing out that by looking at it only from the view of nominal dollars and thus concluding that changes in rates don’t effect prices (or so you seem to be implying) is flatly wrong.

First off--interest rates have very weak to no correlation with even real housing prices. And b--why do you care what real housing prices do? When you make a rent vs. buy decision, you do so based on nominal prices, not real prices.

tatupu70 says

My observation is pointless??? That is my point! That home prices depend on wage inflation and that interest rate changes are pretty much meaningless. And that all of the posters on here who continue to write that when mortgage rates rise, prices are sure to fall are wrong.

I beginning to believe you may be right Tatu... But only because i don't see interest rates rising anytime in the next 5 years. I'm confident the economy is going to stagger along with high unemployment near 10% for years to come... The government can't raise interest rates in that environment. By the time the government allows interest rates to rise at any sort of meaningful rate... The economy will be on to its next boom... By then I'm guessing everyone will be making money hand over fist in solar energy or green jobs. It'll just take some scientific break throughs between now and then to spur it.

RE: 1998 prices and where we stop going down on this next drop.

Those 1998 homes were in GREAT shape and sold for a fair price, with full disclosure rules and were move in ready. They are now coming back as REO's, no disclosures, and a ton of Tiajuana Special remodel work, illegal additions, and ZERO maintenance. The nice window coverings and appliances have all been removed. THe garages and driveways all have big oil stains. The floors and gutters and roofs are all in need of repair. It is my belief that this is why the prices are going to go below the market figures, because 1998's house was in much better shape so it had REAL value. This is just my hunch. The actual value of a home will be 1998 .... and needs to be adjusted up or down from there for what has been done to it in the last 10 years that adds actual value. A nice pool or shop, adds value. A room where the garage used to be with 1/2 of a kitchen cabenit set stuffed in someplace, all done without permits, takes away value. Guess which one you see more of out in the central valley?

tatupu70 says

Yes, and if aliens land on earth tomorrow and hand out free jelly beans to all, then housing prices might rise. OK–once more. If you believe history is any guide, then your above statement has been shown to be utterly false.

If history were any guide, we would not have seen home prices drop like we had in the past four years. Great counter-argument.

tatupu70 says

First off–interest rates have very weak to no correlation with even real housing prices. And b–why do you care what real housing prices do? When you make a rent vs. buy decision, you do so based on nominal prices, not real prices.

That is like asking why we measure anything in terms of real or nominal dollars. Because it's the time value of money. It's like making $50k today and in 20 years when you are making only $60k (while inflation over that time has gone up 40%) you think you're actually making more than you were before. It's a relative indicator. You're either missing the point by miles, or deliberately trying to avoid it.

klarek says

That is like asking why we measure anything in terms of real or nominal dollars. Because it’s the time value of money. It’s like making $50k today and in 20 years when you are making only $60k (while inflation over that time has gone up 40%) you think you’re actually making more than you were before. It’s a relative indicator. You’re either missing the point by miles, or deliberately trying to avoid it.

I'm neither missing the point nor avoiding it. Unless you are evaluating a house purchase solely as an investment based on appreciation--which would be very stupid--then I don't see what the point of using inflation adjusted prices is. If you buy a house as an investment, you do so because you can cash flow based on rent--not because you expect the appreciation to outperform other investments.

And if you do a rent vs. buy calculation you'd damn well better include inflation in your numbers. Because that's one of the main advantages of owning-- your payment stays the same while inflation increases rent, wages, and the home value.