[quote=FormerSanDiegan]Here is a re-post of something I wrote back in February with some historical info …
If rates changed instantaneously by 1% and no other factors in the economy changed, then the price would be inversely related to rate.
However, rate changes never happen in a vaccum. Rates respond to underlying economics, so changes in home prices rarely respond as you suggest.
Example #1: From 2006 to 2010, 30-yr mortgage rates declined from around 6.5% to less than 5%.
Did prices increase by 10%+ during that period ? Hell No. Prices declined at the steepest rates since the depression.
Example #2: In late 2002 30-yr mortgage interest rates were at 6%. BY mid 2006 they were 6.5%.
Were home prices flat during that period ? No. They were quite bubblicious.
Example #3: From 1990 to 1995 rates dropped from 10% + to about 7.5%. Did prices rise during this period ? Not really.
This period current decline) in home prices in post-war California.
Example #4: In 1972, 30-yr mortgage rates were about 7.4%. By 1989, rates were above 10%. What did home prices do doing this period ?
Hint: they did not decline.
The simple point is that it’s not that simple. Rates do not change in a vacuum. As a thought experiment prices are inversely proportional to rates, but in reality, it is not neccessarily so.[/quote]
This is so well written and easily digested that I am going to save it for the next time a friend asks me this question. There are some other great posts about why this happens, but this one explains in laymans terms that history does not support the logical theory that prices are affected by interest rates.
At cocktail parties, when asked this question, the audience usually loses interest at about the 30 minute mark of my explanation (which happens with most other topics too). If I can just memorize this post, I’ll save oodles of time.
