Interest Rates vs. House Price - Posted by Cary-Ut

Posted by GL(ON) on April 03, 2002 at 12:00:24:

In my opinion the big boom hasn’t even begun. Prices are reasonable, interest rates are low, there is no buying frenzy, real estate is not a subject for c*cktail party chatter, the book stores are not full of get rich quick real estate books, real estate gurus are not national heroes. You can buy real estate without tricks, and get positive cash flow on rentals.

All the signs are that we have recovered from the crash of 1990 ( about 5 years ago) and the first big crazy boom of the new millenium is just beginning.

Interest Rates vs. House Price - Posted by Cary-Ut

Posted by Cary-Ut on April 03, 2002 at 08:12:55:


I was pondering the following relationship.

We all know that interest rates of late have been going up, and are expected to do so for the forseeable future. With interest rates going up, doesn’t that automatically mean that house prices should come down? I think so.

So the relationship that I am trying to quantify is this.

If lets say a house is for sale for $100K, and interest rates are 7%. What would a ‘fair’ price be if interest rates were lets say 8%? ( I know I’m going to hear " It’s whatever someone is willing to pay," but from a more philosophical point)

I propose, that one could look at a house value in terms of its payment. If that’s the case then the above example would have a payment of around $665/mo PI. So, if the rates went up to 8% the payment would be, $733 PI. So in order for the PAYMENT to stay at $665, the sale price SHOULD be, about $90500.

So if this relationship were true, then the retail housing market is in for a big change. Right? Because interest rates just last fall were in the 6.5% range, and now are closer to 7.25%.

Any comments???

Re: Interest Rates vs. House Price - Posted by JT-IN

Posted by JT-IN on April 05, 2002 at 07:13:15:


The relationship between interest rates and housing prices is not “linear”, as your example would suggest. Housing prices are driven by demand and affordability. So, if you have high demand and 22% interest rates, then prices will drop. Conversely, if you have high deamnd and affordable interest rates, (anything below 10%), then the market and prices will survive, and prosper in varying degrees… Demand is driven by wants and needs. One issue of housing is, we all need a place to live, so demand has tended to remain constant, with an increasing trend, except in areas of decline, due to blight or loss of desirable incomes. This can stem from company relocations as well as industrial decline, such as the “rust belt”. You notice the oposite effect in the “sun belt”.

The variables depend upon the local economy, job stability, and mindset, which drives the strength or decline in the demand for housing. All of the above is absent any effects of interest rate fluctuation. You see, I am old enough to have been active in the RE business, when mortgage interest rates were in excess of 18%, back in 1980 and 81. Amazingly, housing prices were still resilient to that type of interest rate pressure. This did stimulate quite a lot of owner, creative financing, based on lower rates.

Now, all the above talk is good for theory. So what does all this have to do with what a Creative RE investor should be doing now…? Well, not too much. You see, your premise of your original question is, should I buy now or sit on the sidelines…? (correct me if I am wrong here). Kind of like a market timing question, as it relates to the stock market… Well, RE values are not cyclical like stocks, and are not subject to market valuation nor K-1 reports, or blunders by the likes of Aurther Anderson or Enron. It is a much different animal, so don’t evaluate a “Cat” as if it is a “Dog”.

But cutting to the chase here, the real issue is, if you are buying RE correctly, it matters NOT, whether the market is increasing or decreasing, as to whether you will make money. If you are buying property at 70% or 75% of FMV, or with excellent terms, you can’t help but make moeny in this business. It would be as if someone offered you an opportunity to buy P&G stock for $ 60 per share… (current mkt val $ 85 per share). How long would you have to think about that…? And how much do you want…?

So, in summary, when is the time to buy RE as an investor…? Everyday, if you are buying it right. Today would be a good day to implement that strategy… as I always like to buy on Friday (when it is Friday). But then, I always like to buy on Tuesday (when it is Tuesday).

Adjust your thinking, and your safety belt, and step on the accelerator!

Just the way that I view things…


Re: Interest Rates vs. House Price - Posted by John J

Posted by John J on April 04, 2002 at 24:02:00:

Lower rates allow more people to qualify for a home and this causes some increase in demand. People who apply for a mortgage qualify for a certain amount of monthly payment based on their income, etc. If interest rates drop, then they can qualify for a more expensive home. Rather than pay $100K for a $90K home that they might have bought when rates were higher, they will find and buy the nicest home that they can find for the payments they have qualified for. In my state - Utah - home prices have been very flat in recent years, even though interest rates have dropped significantly. Home prices are more a factor of the economy and migration trends.

Re: Interest Rates vs. House Price - Posted by GL(ON)

Posted by GL(ON) on April 03, 2002 at 09:45:59:

This sounds logical but amazingly, it doesn’t always work that way. As interest rates rise there may be a temporary lull but prices keep rising. Buyers simply pay more for their housing. Rising interest rates are also associated with inflation, and in inflationary times people will justify buying a house as an inflation hedge. Also it is in times of tight money and high interest that all the creative techniques get invented. The ideas we use today came out of the high interest rates and tight money of the late 70’s and 80’s.

So we have higher and higher prices, along with higher and higher interest rates, meaning astronomical payments. People compensate by all kinds of creative tricks until the burden becomes so bone crushing that the average person simply can’t keep up no matter what they do. Then the market collapses as individuals lose their houses, prices drop, then all the speculators who depended on ever rising prices, get slaughtered. This is what happened in the 70’s and 80’s. The first big RE bust of the creative RE era was in 1980-81 when interest rates hit 21% (yes, they really did) and the next time in 1990 when prices were bid up to unsustainable levels.

So to answer your question, there may be a slight lull but higher interest rates will probably mean a boom in prices - at least for a while.

Inflation was at a low level for years but in the last year or two it has taken a decide surge.

I’m also thinking of all the investors who used to put their money into stocks and mutual funds. They haven’t been doing so well for the last few years. If they notice that real estate prices are rising faster than the stock market, and decide to get in on a good thing, what will happen to prices as all those billions pile into the real estate market? I believe the surge in RE prices seen in some areas is a result of the smart investors who pulled out of the stock market a couple of years ago. As it becomes more obvious that they were smart to do so, more and more investors will follow the trend and it will become a self fulfilling system. Eventually everyone will be into real estate, the influx of new money will dry up just as prices reach unsustainable levels, and down we will go again.

That is the way real estate goes, and the way it has always gone. So catch a wave, and be sitting on top of the world.

Re: Interest Rates vs. House Price - Posted by Cary-Ut

Posted by Cary-Ut on April 03, 2002 at 11:29:58:

Very interesting, and it is a point that I had not considered.

So, I guess my question then becomes, do you think that most people are done with thier bag of ‘tricks’ and that the RE market is to crash? or, do you think that there is so much money sitting on the stock market sidelines, that’s about to influx into RE and cause a boom? or, there will be as much money leaving the RE market ( people out of thier tricks) as coming in from stocks, that the RE market will stay the same?

Bullish, bearish, or neutral?