# Calling all mathematicians! - Posted by Wayne-NC

Posted by Wayne-NC on July 09, 2005 at 11:44:01:

Hi John, that came to me in a private e-mail and that person claimed to use RE computer software and some math. Never did get the formula. I like your analysis very much dispelling the correlation between interest rates and housing prices. What I was looking for is a hypothetical situation that may occur or another tool to quickly analyze a future purchase from a historical point of view. For example, I would like to buy in Kauai and prices are 3rd on the list of potential bubbles. I know that mortgage interest rates are going up and I would like to see home prices drop. But how much would make it a better deal than now? Well, if next year rates are 1% higher and home prices have gone down (maybe a market loosing air) by 12% or more, than I view it as a better value buy than now. One way to look at things. Also, Hawaii has been a very volatile market due to a couple of reasons. First and foremost, it is a fly too destination which takes alot of very expensive fuel to get to. Second and related to that is terrorist fears of flying which along with fuel, will hurt its major industry-tourism. I might add that local wages cannot support those prices. Sooner or later, homes will cashflow and that will be my time to buy. Every trip out there will now be tax deductable! I hope they move the next convention there. Mine is already paid for.

Calling all mathematicians! - Posted by Wayne-NC

Posted by Wayne-NC on July 08, 2005 at 10:19:30:

What would be the formula to figure this problem? A 1% change in the mortgage interest rates=X% decrease in purchase price keeping the payments the same. Base this on a 30 fixed rate mortgage. Solve for X. My answer is 10 by trial an error. Consequently, a half percent increase equates to a 5% decrease in price, again keeping the payments the same. See where I am going with this? I postulate that if mortgage rates go up by 1% and housing prices drop by more than 10%, better value is found. I like that for 2 reasons. First, more “mathematical equity” is found and second, the higher interest portion of the payment is tax deductable. Conclusion, same payment, more house and, better tax benefit. Can anybody elaborate on this?

Re: Calling all mathematicians! - Posted by Bruce

Posted by Bruce on July 13, 2005 at 13:47:31:

The answer is roughly 9.89%. It is pretty easy to just plug in different loan amounts and they all come out to about 9.89% decrease in purchase price.

Re: Calling all mathematicians! - Posted by Don Dion

Posted by Don Dion on July 09, 2005 at 16:54:54:

This might work for commercial as a rule of thumb but it will have little if any effect on residential pricing.

Re: Calling all mathematicians! - Posted by John B. Corey Jr.

Posted by John B. Corey Jr. on July 09, 2005 at 10:45:13:

Wayne,

Good topic for a discussion.

1. The math implies a reality that rarely happens.

Most properties are owner occupied. People who live in their own home tend to stay rather then sell into a falling market. Not everyone but enough to distort the implied model

1. I did not run the math myself. I find the numbers to be a bit extreme so either the math is off or the model is wrong.

Interest rates have bounced around this year. From the Federal Reserve’s point of view short term rates have risen 9 times. Mortgage rates have bounced around but might be about as low now as a few months ago.

So, what do we use as the benchmark for the interest rates?

Second, if you were to look back at interest rates during periods when rates really went up you will see some things.

1. The number of sales went down.
2. Prices stabilized (went flat) or dropped but not proportionally to the interest rates.
3. Creative finance kicked in more (either lenders came up with new products or sellers will facilitate sales with soft terms).

On the tax benefits. You pay more interest and have a lower net worth for the same payment. You have less depreciation if the property is NOO. You get a higher interest deduction (OO or NOO though for NOO it is not so much the interest deduction that matters).

John Corey
Chelsea Private Equity LLC