I know higher rates mean lower home prices (generally) b/c people think monthly payments when buying a home.
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This makes sense intuitively, but is not borne out by historical experience. For example, housing prices increased dramatically during the 70s and early-80s even though rates were increasing, because rents were tracking (high) inflation. Folks bought as a hedge against future inflation despite the high interest rates.
That may or may not happen this time around. It’s too early to tell. I think higher interest rates will hurt the housing “recovery” for a while… but longer term it’s hard to say.[/quote]
I think this has a lot to do with the fact that Baby Boomers were in their peak buying years during this time. IMHO, this population buldge is responsible for a lot of market movement over the decades; and we just might see some more of the effects if/when they need to start selling assets in order to sustain themselves in retirement.
BTW, for anyone who doubts the effects interest rates have on housing prices, consider for a moment why the Federal Reserve has been buying MBSs and Treasuries hand-over-fist this past year. What do you think would happen to the housing market if rates were allowed to go to 7-10% tomorrow?
IMHO, interest rates actually affect the real estate market in two different ways:
1. They reduce the costs for buyers at a particular price point. (which eventually drives prices up, so buyers don’t see more “affordable” housing after all)
2. In the current environment, the low rates are behind the surge of cash investments we’re seeing in the RE market (IMHO). Investors are trying to escape the pain of being in low-rate bonds and debt instruments. In today’s market, they can buy houses for cash, and make a greater return on rentals than they can in in the debt/bond markets. Also, cash investors are worried about inflation and the future of the dollar. This is forcing lots of money into housing at this point in time.
When rates are kept low, it forces more conservative fixed-income investors into riskier assets. This is why I believe the credit bubble grew exponentially when rates were being held so low after 2001, and why we saw the rapid growth of the mortgage-related “innovations” during this time. Low rates and easy money (malinvestment, IMHO) are very closely related.
The Fed/govt are squeezing people out of their cash positions because they are trying to reinflate asset prices (including houses). Who knows what the long-term implications of this will be, but I think it will get ugly (and this is why we are now in cash).
