Interest rates affect how much a buyer can pay for a given house, they do not affect whether the house they purchase is a move-up/down house once prices have adjusted for the interest rate movement.
The only time interest rates will affect what a person can buy (as opposed to how much they can spend on a given house) is if those rates are available only to an exclusive group.
It’s just like with the homebuyer tax credit — it affected the PRICES that people were able to pay for a given house; it did NOT mean that they were able to buy “more” house. Why? Because everybody else had access to that same tax credit, which pushed up everybody’s purchasing power. This pushes PRICES up all across the board (though price changes lag as they roll up and down through the tiers), it does not enable people to buy a nicer home.
Given that mortgage rates are at/near all-time lows, what happens when they double and go back to more “normal” levels?
Incentives that are broadly available benefit sellers, not buyers.[/quote]
CAR, I agree that those “ill-thought-out” tax credits benefited no one but sellers.
However, in CA coastal counties, I don’t believe that price points within the residential tiers of RE are set on the prevailing mortgage interest rate (MIR). They are set purely upon what a buyer is willing to pay for the property.
This has always been so because there is a captive audience and large cohort of “nearly all cash” and “all cash” buyers in all of these (resale) micro-markets.
The exception to this rule is the new construction tract where the developer assists buyers in financing alongside their on-site “preferred lender.” These subdivisions typically attract the highly-leveraged buyer and typically have little or no surrounding sold comps to justify the prices they are asking (and hold fast to).
IOW, in CA’s most coveted areas, offers coming from highly-leveraged potential buyers have historically been at a distinct disadvantage.
With the ultra-low MIRs of recent years, FTB’s (as well as 2nd time buyers) have been able to buy much more house than they would have been able to had fixed MIR’s been in the “normal” 7-9% range. These buyers have been “spoiled” by what they (or their peers) have been able to buy, so much so that a “regular” house in a “regular” middle-class area in coastal CA counties is no longer “acceptable” to them.
As we all know, it is much more (psychologically) difficult to “trade down” in house/neighborhood than it is to trade up. This younger subset of buyers who has never seen “normal” fixed MIRs in their adult lifetimes can’t “envision” themselves living in one of those “regular” houses or in a “regular” ‘hood. They feel they are “above” doing this where similarly-situated and above previous generations “expected” to “pay their dues” as a prerequisite to “climbing the housing ladder.”
The current cohort of buyers in “family-raising mode” has to have it all NOW or they won’t buy at all. If they DO break down and buy in an established area (usually only because that is all that is available in a particular locale), they often won’t even move in until the home is remodeled to their satisfaction.
