The kicker is how long they will be able to do that. If the Fed raises the borrowing rate for banks, they won’t be able to hold back inventory and the supply will balloon. [/quote]
I’m not following your logic here. What is the relationship between the “borrowing rate for banks” and inventory that is being held back?
[quote=sreeb]
If interest rates for buyers increase, demand will implode. [/quote]
What does history tell us about the relationship between interest rates, inflation (rents, specifically), and housing prices? (Not that history is always a good precedent, but it should be considered, yes?)[/quote]
I’m guessing sreeb is referring to the fact that the IR curve might flatten, and/or that money would become tighter and they would want to dispose of their REO inventory in anticipation of falling collateral value in order to minimize losses.
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As to the relationship between housing prices and interest rates, it looks like they track each other. It’s interesting to see that whenever we see a low spot in the interest rate chart, it precedes a rising trend in housing prices.
Conversely, you see interest rates spiking right before home prices begin to roll over (in general).
So, while it *appears* that housing prices are rising along with interest rates (and they have), I think that’s a result of the psychology of the market. It looks like the Fed sees the rising trend in house prices, and raises rates in order to head them off. A spike in rates does indeed look like it causes prices to roll over about a year or so later.
My guess is that housing prices lag interest rate moves because housing prices are “sticky” and it takes a while for buyers and sellers to adjust to the new numbers (just like today’s sellers think 2005 prices were “normal,” prices probably won’t change overnight).
Another thing to consider is that housing was specifically targeted during this credit bubble and people were able to get loans that consumed over 50% (!!!) of their pay. When you’ve hit the affordability ceiling on monthly payments, there’s no doubt that rising rates would affect housing prices. This is exactly why the Fed is holding rates down, IMHO.
Additionally, Baby Boomers were in their peak home buying years in the 1970s-2000s. I believe they they’ll be entering their peak selling years over the next couple of decades.
