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…