[quote=FormerSanDiegan]CAR –
I agree that there are many other factors, that is my whole point. You pointed out several, including demographics and other loan conditions besides interest rates. Therefore one cannot conclude that a 1% rate increase results in a X% price decrease. (or that it necessarily automatically results in a price decrease at all).
In the 2006 to 2010 time frame, rates declined in the context of declining GDP, growing unemployment, tightening of lending standards, and the gravity of market fundamentals (prices outstripped rents and incomes). It is obvious in hindsight that those factors trumped changes in interest rates.
If interest rates were to rise in the context of a growing economy, declining unemployment, and loosening lending standards, prices may or may not rise.
I am not insisting that rising rates always result in rising prices. I am simply pointing out that rising rates do not necessarily result in lower prices as borne out by the examples above.
People seem to believe in the model of an inverse relationship between prices and interest rates when in reality there is historically as much or more evidence of the opposite being true.[/quote]
Right, there are many factors that can affect prices, but it’s also important to note what kind of financing buyers are using, and if that trend is changing over time. Just using the 30-yr FRM as a benchmark doesn’t tell the whole story.
My point is that the “recession” began as rates were rising, making those ARM/neg-am loans extremely risky, as many people saw drastic increases in their monthly payment. That’s what began the “subprime crisis” which was the impetus for the dramatically falling prices (prices had been falling already in many areas, but the rising rates pushed it over the edge; price declines accelerated as short-term rates rose). I would contend that the rising rates were what caused the game to stop, because so many people had payments that were tied to short-term rates rather than having 30-year FRMs. Once the Fed slashed rates again, the bleeding mostly slowed greatly because those ARMs were adjusting back down again. That is why we’ve seen a relative plateau in prices, IMHO; interest rates have fallen at a time when prices should have dropped for an extended period of time.
