>1% interest SPIKE = 10% house price drop?

[CA renter]

[quote=FormerSanDiegan]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This period included the worst decline (until superceded by the 2006-2009 decline) in home prices in post-war California.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]

You’re right about various factors affecting RE prices (including interest rates), but in your 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.

Interest rates were *effectively* increasing because people had been using ARMs during the bubble, and were moving to fixed-rate mortgages in larger numbers. The “cheap” neg-am and hybrid-ARM loans with ~1-3% interest rates were disappearing, so buyers of houses were paying higher (FRM) interest rates, which is what caused the price declines. Also, existing “homeowners” with ARMs were seeing their rates increase at the beginning of this period, which is when we saw the steepest price declines. Once those short-term interest rates stabilized (thanks to govt intervention), we saw less distress.

——————

In your example #2:

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.

Rates were *effectively* going down during this time because people were moving from (higher) fixed-rate to (lower) adjustable-rate mortgages en masse, and the ultra-cheap neg-am loans were beginning to hit the market in larger numbers as well.

In essence, you can’t really look at 30-year mortgages and make assumptions about prices based on what those rates were doing. We have to look at what was happening in the mortgage market, in general, and look for changing trends to know what was really going on.
—————

Also, in your example #4, during the 70s and 80s, Baby Boomers began entering their peak buying years. Additionally, women were entering the workforce in unprecedented numbers, forcing prices up (IMHO, this is where all that “inflation” came from during the 70s and 80s). If interest rates hadn’t been rising during this time, prices would probably have skyrocketed even higher.

[(former)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.

[(former)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.

[(former)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.

[(former)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.

[(former)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.

[CA renter]

[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.

[CA renter]

[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.

[CA renter]

[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.

[CA renter]

[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.

[CA renter]

[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.

[(former)FormerSanDiegan]

Sure, the resets of 2-year teaser rates in the sub-prime category was the initial trigger. The rest of the decline is due to “gravity.” (prices falling to levels more in line with fundamentals).

During the adjustment period (reversion to the mean) from 2007 to 2010 or so, rates declined precipitously but housing prices declined as well. Obviously the force of gravity outweighed changes in rates during that time.

The answer to the original quesiton of this thread “>1% interest SPIKE = 10% house price drop? ” is “NO.” I think we can also agree on that.

[(former)FormerSanDiegan]

Sure, the resets of 2-year teaser rates in the sub-prime category was the initial trigger. The rest of the decline is due to “gravity.” (prices falling to levels more in line with fundamentals).

During the adjustment period (reversion to the mean) from 2007 to 2010 or so, rates declined precipitously but housing prices declined as well. Obviously the force of gravity outweighed changes in rates during that time.

The answer to the original quesiton of this thread “>1% interest SPIKE = 10% house price drop? ” is “NO.” I think we can also agree on that.

[(former)FormerSanDiegan]

Sure, the resets of 2-year teaser rates in the sub-prime category was the initial trigger. The rest of the decline is due to “gravity.” (prices falling to levels more in line with fundamentals).

During the adjustment period (reversion to the mean) from 2007 to 2010 or so, rates declined precipitously but housing prices declined as well. Obviously the force of gravity outweighed changes in rates during that time.

The answer to the original quesiton of this thread “>1% interest SPIKE = 10% house price drop? ” is “NO.” I think we can also agree on that.

[(former)FormerSanDiegan]

Sure, the resets of 2-year teaser rates in the sub-prime category was the initial trigger. The rest of the decline is due to “gravity.” (prices falling to levels more in line with fundamentals).

During the adjustment period (reversion to the mean) from 2007 to 2010 or so, rates declined precipitously but housing prices declined as well. Obviously the force of gravity outweighed changes in rates during that time.

The answer to the original quesiton of this thread “>1% interest SPIKE = 10% house price drop? ” is “NO.” I think we can also agree on that.

[Author]

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