Posted by: The Tim

Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market.

20 responses to “Poll: Buyers: What interest rate would price you out of the market?”

  1. Eleua

    The question is false.

    To be accurate, the question is better framed as at “what interest rate would take you out of the market if PRICES WERE TO REMAIN AT CURRENT LEVELS?”

    The problem is that as rates go down, the price of the house goes up. We saw this from the 1980s to today. The reverse is also true, even if it is still relegated to theory. As rates rise, the banks take a larger chunk of the buyer’s revenue stream, which means that the seller takes a lower portion.

    Additionally, as rates rise, the aggregate money supply shrinks (circulation drop)., which is a “double whammy” on housing prices. The banker takes a larger portion of a shrinking budget. This presumes we avoid the “triple whammy” of all the speculation money coming out of the market, since the trend is now down, rather than “real estate always goes up,” or some such drivel.

    I’m guessing that the true value of a house, when compared to the price at the low tick on rates, has dropped about 15% in the past month.

    Rising rates, stable prices, and stagnant incomes is a mix that is not stable. Something has to give, and I’m betting on prices being the component that is the most fragile.

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  2. FWIW

    Interesting that you stop at 8% when there was a time, in the 70’s, when that would have been a ‘dream’ rate; most RE was over 9%, and for some time was as much as 12%+.
    That was when there were stricter rules of down payment and income-to- debt ratio, etc., as well.
    In spite of it all, I think income and the chance to grow it was in a much more nutritious environment, and development here went on quite well.

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  3. JWS

    RE: Eleua @ 1

    “I’m guessing that the true value of a house, when compared to the price at the low tick on rates, has dropped about 15% in the past month.”

    The “true value” of a house is what someone is willing to pay for it, not a theoretical price based on changing interest rates.

    I agree that banks and investors will take a larger chunk of buyer’s income when rates go up, however an improving economy and job market could offset this. Rising rates may not necessarily lead to lower home prices, there are many factors to take into consideration.

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  4. David B.

    RE: Eleua @ 1 – “To be accurate, the question is better framed as at ‘what interest rate would take you out of the market if PRICES WERE TO REMAIN AT CURRENT LEVELS?'” Precisely.

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  5. David B.

    RE: FWIW @ 2 – My parents bought a house in the late 70s (1978 if I believe) when interest rates had just gone over 8%, and they felt robbed at the time. A few years later, rates were in the double digits, and they felt lucky.

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  6. Doug

    Agree with Eleua.

    No rates will price me out of the market, since they should affect prices as well.

    However, the rates do affect one thing. We’re currently sitting on a ton of equity and a very low interest rate. If rates stay fairly flat over the next couple years, we’ll be looking to upgrade our house in about two years.

    If rates go up and housing prices accordingly fall some, it will incline me to hold off on purchasing a house until I save up a down payment on a home (without using equity), and I will rent out my current home at that time. This will put off my purchase of a home by at least 5 years. (unless my income shoots up)

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  7. erik

    RE: Doug @ 6
    Sell now or maybe next summer, collect the equity, and find a better deal if you think prices are up. That’s what I am gonna do.

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  8. mike

    It’s my suspicion that after the bust and recession a lot of people are buying less expensive homes than they might have otherwise chosen a few years ago – IE 2 income households are scaling back to 1 income homes rather than pushing the limit. Likewise, the marginal and financially less savvy buyers that might have been tempted to push the limit with a funky subprime loan are now busy renting as their credit scores sit in the 500-point range.

    Because of this, I believe current buyers have more flexibility in payment than they might have had back when ‘maxing out’ was en vogue. Probably varies quite a bit by neighborhood, but I’d love to see some good data on it.

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  9. whatsmyname

    By Eleua @ 1:

    The problem is that as rates go down, the price of the house goes up. We saw this from the 1980s to today.

    From late 2008 to late 2012 mortgage rates went down 3 points from 6.5% to 3.5% (46%). You are contending that the price of houses went up during this period?

    reverse is also true, even if it is still relegated to theory.

    It certainly is still relegated to theory. From 1978 through 1981 mortage rates went up from about 9% to about 18%. Here is a census table which includes new construction prices for the period. The nationwide median went from about $53,000 to about $69,000 (about a 30% increase over 4 years).

    http://www.census.gov/const/uspricemon.pdf

    guessing that the true value of a house, when compared to the price at the low tick on rates, has dropped about 15% in the past month.

    Rates are up about 0.5% this month. If that equates to 15% drop in value, will a 3% rate increase equate to a 90% drop in value? Should the 3% decrease mentioned above have increased values by 90%?

    This is so darn confusing.

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  10. Ron

    The US recession of 2007 ended in June 2009, 36 months ago and the average US expansion lasts 57 months. This last recession cold-cocked a whole lot of people and my guess is that the next recession will bring with it a significant amount of panic as people’s memory of this last one is still frightening. I have a hard time believing that housing won’t be hit hard during the next downturn. I for one have spent the last 3 years preparing for another economic downturn and will stay diligent until it happens because it ain’t gonna be pretty.

    We’re in a county that has become so mean spirited. It will be interesting to see how the housing industry and the Fed react to the next downturn but one thing’s for sure, the response won’t be average and housing prices will probably take a big hit considering how fragile things are.

    On a brighter note, there is almost a perfect correlation between people who appose gay marriage and people who won’t try sushi!

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  11. Azucar

    By Eleua @ 1:

    The question is false.

    To be accurate, the question is better framed as at “what interest rate would take you out of the market if PRICES WERE TO REMAIN AT CURRENT LEVELS?”

    The problem is that as rates go down, the price of the house goes up. We saw this from the 1980s to today. The reverse is also true, even if it is still relegated to theory. As rates rise, the banks take a larger chunk of the buyer’s revenue stream, which means that the seller takes a lower portion.

    Additionally, as rates rise, the aggregate money supply shrinks (circulation drop)., which is a “double whammy” on housing prices. The banker takes a larger portion of a shrinking budget. This presumes we avoid the “triple whammy” of all the speculation money coming out of the market, since the trend is now down, rather than “real estate always goes up,” or some such drivel.

    I’m guessing that the true value of a house, when compared to the price at the low tick on rates, has dropped about 15% in the past month.

    Rising rates, stable prices, and stagnant incomes is a mix that is not stable. Something has to give, and I’m betting on prices being the component that is the most fragile.

    As I have a pretty large down payment saved up, rising rates would be nice if things were as clear cut as you imply that they are… with rising rates causing a “triple whammy” that makes prices drop significantly. Unfortunately, in practice prices don’t seem to react as predictably as you suggest that they will. The Tim did an analysis of it in a post back in 2010…

    http://seattlebubble.com/blog/2010/02/09/do-rising-interest-rates-lead-to-falling-home-prices/

    Although it did highlight that significant increases in interest rates were noted during two periods of declining prices, I don’t see a great overall correlation of decreasing prices with increasing interest rates. To me, the graphs look disjointed enough that I won’t count on prices declining as interest rates increase (I see the rationale behind thinking that a higher monthly payment for a given price will result in lower pricing in general… I just don’t think that it behaves that way very predictably). I think that some of the reason behind the apparent disconnect behind the seemingly obvious theory and what really happens is that interest rates are typically raised when the economy is booming (and housing prices are rising with other prices), so it cancels a lot of the expected effect.

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  12. Mikal

    RE: whatsmyname @ 9 – Eleau always posts things that make alot of sense. Except the economy never makes alot of sense. I still own three houses and two of them pay for theirs plus the one I live in and add $1000 to my bank account each month. Most of the people that dog about housing are idiots. You will never be able to buy a house on Capitol Hill or Fremont.

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  13. Erik

    RE: Mikal @ 12
    Yeah, we are here to try and figure it out though.

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  14. Erik

    RE: Eleua @ 1
    Yeah, but do you think at these super low interest rates, prices will really drop if interest rates go to say… 5%. Robert Shiller said when interest rates go from super low to low, prices historically aren’t affected.

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  15. wreckingbull

    RE: whatsmyname @ 9 – I don’t know if you remember the late 70’s, but wage inflation was occurring. Today that is absent, most notably due to global wage arbitrage.

    As to your last point, where did he state the relationship was linear?

    I think most of your confusion comes from the fact that you are not controlling for other variables. Hope that helps.

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  16. softwarengineer

    RE: wreckingbull @ 15

    Yes Wreckingbull

    Even comparing this “debt-infused glue board house economy for more overpopulation” to the 70s is a joke too. We made things in America then and didn’t resort to building low wage phony “made in America” manufacturing with “Foreign Overlords in America” to shut these temporary plants down, if we stop buying their engineered/managed manufacturing units. Also, countries like Japan can afford “debt-infused” zombie interest rates, their domestic manufacturing is much healthier than than America, they’ve got equity.

    Also, unemployment was counted accurately back then, not like today’s phony unemployment count “cooked books”.

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  17. SG

    RE: softwarengineer @ 16 – I gave you a thumbs up . Not because I agree with you. But because this time you resisted the urge to capitalize your entire post like a newspaper headline.

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  18. whatsmyname

    By wreckingbull @ 15:

    I do remember the late 70’s. Wage inflation (or let’s be honest and call it general inflation) was a big part of not only increasing house prices, but also of increasing interest rates.
    I think that the overall variance in rates – ranging 5% to 14% over the current 4% rate, (or relationally 125% to 350% higher than current rates) accounts for a pretty significant inflation variable. But mostly I am glad that you agree with me that when rates move up, prices do not necessarily move down. It is demonstrated fact that they may move up. I will say that it is odd that you phrased it as a disagreement. It is the E-man who forgot to control for variables.

    As to the linear relationship, he did say that he was “guessing”. And I am guessing that his guessing analysis was not so detailed as to whether this would be a linear relationship or not. Do you have some reason to think it was not a linear relationship? If not linear, it would seem counter-intuitive to me that a small difference would be more impactful in the marketplace than a large difference. That’s not the way that panics work.

    I am glad you gave me the opportunity to revisit this post, however, because I should have also mentioned this notion from post 1:

    “Rising rates, stable prices, and stagnant incomes is a mix that is not stable.”

    However true this may or may not be; it is an irrelevancy. We are not experiencing stable prices. If you don’t know this now, you will know it soon enough.

    Hope that helps.

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  19. Jonness

    By wreckingbull @ 15:

    RE: whatsmyname @ 9 – I don’t know if you remember the late 70’s, but wage inflation was occurring. Today that is absent, most notably due to global wage arbitrage..

    Printing money can destroy the dollar whether jobs exist or not. If the dollar loses value, you wind up paying off your house you buy today with super cheap dollars of the future.

    I’m not saying it will happen, but it certainly can happen.

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  20. Friday Friday

    In honesty, I think the current opportunities are less abundant than they were in 70’s, which is why the the result is at 8% and above. It would be interesting to see more specific numbers above 8% and see what it comes out as.

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