Posted by: Timothy Ellis (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.

6 responses to “Affordability: Price Declines Offset by Increasing Rates”

  1. masaba

    Hey, Tim, I’m curious, why do you put the, “if rates were 6%” line on these? If rates were ‘at a more sane’ 6% a lot of things would be different in our economy. To start with, higher rates would probably mean higher inflation, wage growth, and a stronger economy in general. In fact, home prices are not very strongly correlated with interest rates at all, strange as it may seem. U.S. home prices have actually seen stronger gains when interest rates are higher. This may seem counterintuitive based on first order effects, but the second order effects of higher interest rates are really what drive home prices, not the interest rate itself.

    http://www.economist.com/blogs/buttonwood/2012/04/house-prices-and-interest-rates

    Basically, if anyone is waiting for rates to rise thinking that home prices will in-turn decrease, they are probably in for a rude shock.

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  2. Kary L. Krismer

    RE: masaba @ 1 – I tend to agree with your point, but the reason for the price effect you mention is high rates typically occur during periods of inflation, and if real estate doesn’t keep up it will probably catch up.

    But in defense of Tim, 6% is a fairly normal rate, not one likely to be the result of inflation, and thus not one likely to result in higher house prices due to inflation. And our lower rates are government manufactured rates. If they were market driven, then Tim’s choice of using 6% would seem odd.

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  3. masaba

    The current rates aren’t really as much government driven as they are market driven. Companies and people are sitting on hordes of cash that they want to invest, not spend, thus there is an oversupply of cash and a demand for investments, causing rates to be low. As evidence of this, household debt is at something like a 50 year low and household savings are at one of their highest points in American history. I agree that QE has an affect as well on the current rates, but they have slowed QE a few times and rates haven’t really moved that much.

    Again, I would be leery to make a prediction that when QE ends, rates will spike to 6% and home prices will fall. I’ve heard this prediction many times, and usually, when everyone agrees that something will happen, it doesn’t turn out that way. I’m not saying that it won’t happen (no one can predict the future), but I wouldn’t put a lot of faith in that forecast. For all we know, when QE ends inflation could skyrocket and home prices will skyrocket as well. No way to tell these things for sure.

    I would put more faith in the reality of the current moment, which is interest rates of 4.25% and a reasonable home affordability index. Not an imaginary, albeit saner, 6% situation that will probably never materialize. My guess is that most people on this blog do the same.

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  4. softwarengineer

    70% of Economy is Consumer Driven

    Not homes BTW [especially refinancing]; but cars, manufactured goods and services [like eating out].

    With retirees and younger worker investors making like 0% interest on safe investments for consumer purchases, our efforts to keep mortgage interest down is like throwing gasoline on a destroyed economy base fire to put it out…

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  5. Lo Ball Jones

    California cheaper then Seattle and getting more so? Time to flee.

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  6. Scott Celley

    Hi Tim, love your approach to things. Here’s something else for you to consider in your affordability analysis: assumable mortgages. As a result of the Government’s unprecedented participation in the US mortgage market over the last 5 years there are now more than 9 million assumable loans out there (FHA or VA backed), totaling $1.4 trillion in funding. That’s one out of every six mortgages, and far more than ever before in our history. These loans were nearly all written at historically low rates. When these homes sell, buyer’s can assume the existing mortgage and lower interest rate thereby preserving some level of affordability.

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