Interest Rates Effect on Home Prices

General Real Estate Investing
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Interest Rates Effect on Home Prices

Nate Crump
Provo, UT · Member since 2013 · 36 posts · 6 votes

Just thinking out loud here. I hear comments along the lines of, "jump in while interest rates are low/before they go up" all the time. I was wondering what the effect would be if they go up.

Always having been a huge believer in the invisible hand of economics (Adam Smith), and believing that Joe/Jane Home Buyer buys a home based on what they can afford monthly, it makes me think home prices would follow interest rates, maybe almost to scale with a few hiccups here and there.

If a family can afford $1,000 per month and can get a 4% interest rate, they might get a $200,000 home, give or take. But if down the road interest rates were, oh I don't know, 8% or so, they would maybe only be able to get a $130,000 home.

I don't think incomes would quickly and magically go up with interest rates, so it leads me to believe that over time, home prices would have to adjust and that $200,000 home would have to make its way toward $130,000.

I understand this is a very simplistic way of seeing it, but I wonder if any have any ideas?

It mostly makes me think that in all honesty, it wouldn't be the worst thing in the world for investors. Maybe a different type of investor would benefit, for sure. Those who can buy homes with cash. Especially if interest rates went back up to those mid-teens levels that I hear they were at in the 80's when I was just a kid.

Or, maybe there is still room for financing rental properties, and the fact that an interest rate jumps over a period of time from 4% to 8% or whatever, is countered by the fact that the price has dropped 30%, or 50%, and you just have to put a little more down up front, and there is more incentive to pay it off quicker rather than go get property number two.

I'd love to hear what some people think. As a disclaimer, although I have no proof, I actually believe whole-heartedly that some people simply think rates will go up, because "what goes up, must go down", and vice versa. I personally don't see why rates can't stay artificially low and suppressed by the Fed for decades to come, seeing as even the government is addicted to cheap money, and can't afford a rate hike on their massive debt, and the Fed is deathly scared of housing crashes, and inflating our money into oblivion is part of their plan.

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  • Rafael Floresta
    Investor · Philadelphia, PA · Member since 2013 · 348 posts · 111 votes
    12y

    Very good points Nate, but a few things to consider:

    "I actually believe whole-heartedly that some people simply think rates will go up, because "what goes up, must go down", and vice versa."

    There is a lot of info on QE3, that explain why interest rates are low. There is also a lot of talk about it being reduced, and that will cause rates to go up.

    "and believing that Joe/Jane Home Buyer buys a home based on what they can afford monthly"

    You can bet on that. But one good point to consider is that if you have a good rate on a mortgage, ** I believe ** there are ways to keep that low rate and sell your house at a premium, if the buyer has enough downpayment to cover. I couldn't find a source on this, but I've talked about it with my mortgage broker many times. Hopefully someone can correct me or provide a source.

    => Another result of high rates could be comeback to inflation, which makes the math work to the investor that has a fixed loan.

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  • Tom Goans
    Real Estate Investor · Englewood, CO · Member since 2013 · 988 posts · 258 votes
    12y

    @Nate Crump,

    In my opinion, you were on the right track until the statement:

    "I personally don't see why rates can't stay artificially low and suppressed by the Fed for decades to come, seeing as even the government is addicted to cheap money, and can't afford a rate hike on their massive debt, and the Fed is deathly scared of housing crashes, and inflating our money into oblivion is part of their plan."

    You can put realistic numbers to your thoughts on how interest rates affect purchasing power. What you stated is correct. Running the numbers with a financial calculator will bring it to reality.

    There are so many problems with your artificially low interest rate statement that it is too long to list.

    The list will include dollar valuation and inflation. These situations are real and historically proven. Research what happened during the President Carter days in the late 1970s to get an idea of potential inflation and the results.

    Probably more importantly, and it has already begun, the primary U.S. lender - by buying federal bonds - is already turning to other investments that offer greater security and returns. The U.S. money well is drying up.

    At the risk of offending you or other members of this blog, please broaden your sources for economic information and understanding. Your statement and philosophy suggests to me you are listening too much to one side of the argument. Please forgive me if I was too blunt. I may not be 100 percent correct, but I have gone through many economic cycles.

    • One thing I have learned over the years, there are many ways to play with money and economics. However, the games will eventually come back to haunt you. This is true with all economics, including with your investing philosophy.
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  • Nate Crump
    OP
    Provo, UT · Member since 2013 · 36 posts · 6 votes
    12y

    @Tom Goans

    I'm not sure I followed completely, and definitely don't worry about offending me on the subject; I don't think I have all the answers.

    As far as stating that I think interest rates are artificially low, the reason I say that is because it seems to me there is one entity that is deciding what the base rate will be for all banks across the country.

    I wonder if instead, if interest rates were left up to banks and the free market, would they maybe not be higher than they are right now, especially as competition has heated up a little recently, as far as home prices having gone back up a bit. I really don't know, but I don't see how one man, or one committee determining what interest rates should be for an entire country, can be a good thing. I also think it leaves a lot of room for an agenda of someone's to be brought into play. I'd be interested to know what you, or others think.

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  • Tom Goans
    Real Estate Investor · Englewood, CO · Member since 2013 · 988 posts · 258 votes
    12y

    @Nate Crump,

    It is my opinion that is based upon what I have experienced and learned, that many minds and people control the economy, including interest rates. This applies to the world economy all the way down to your local government.

    It is not just a few in government that control or manipulate the economy and flow of money. Wall Street continually plays a major roll as well as do investors from around the world. Even Warren Buffett has influence.

    While some circles like to point fingers to just a few people, like they did in the last "recession", there are many controlling factors and people involved ... in my opinion.

    I believe and agree with Wall Street investors and the U.S. federal government that if they were not manipulating the U.S. economy right now, interest rates would be much higher. I also agree that once they pull back from manipulating the U.S. money and economy, the result will be inflation, higher interest rates, and fewer U.S. lenders. The latter can have a huge influence.

    I am of the opinion that Europe has been taking its medicine the past few years by making efforts to reduce government debt and the burden on society. The U.S. has been doing the opposite to please voters. The European economy may not be robust right now, but will become better and more attractive to investors (lenders) than the U.S. in the near future. Thus, less money interested in buying U.S debt. This can result in greater inflation and even higher interest rates to attract investors.

    This all comes into play with the future of the real estate business. If my analysis is partially correct, once again there will be a reduction in real estate property values, interest rates will rise above 10 percent, buying power will continue to reduce, properties will be difficult to sell and rent, investment cash flow will be reduced, and so on. Reflect upon the period between 2007-2010.

    This is just the opinion of this old investor. I am never 100 percent correct. But, what if? This is a very complex subject that is ever changing.

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