Impact of interest rates on prices?

Question

Primary home interest rates are almost 5% for a 30 yr fixed and almost 5.5% for 30 yr fixed on investment. What do you guys think interest rates will do to SFH and Multi-family prices?

Mike Dymski · Answer

Truth - no one knows what is going to happen with prices and rates.  If they did, there are a lot easier ways to make a profit on that knowledge than buying or selling real estate.

Financial obligations (bank payments + rent) as a percentage of disposable income is at a 40-year low.

Although commodity price inflation has been severe, prices are just getting back to 2014 levels.

The average household wealth of the bottom 50% of households is at a historic high...there is no comparable period whatsoever.

If you back out real estate gains, net worth is over 100% higher than pre-pandemic levels for the bottom 50% of households.

Bank deposit balances of the the bottom 50% are $10,000+ and $3,000 above pre-pandemic levels, and kept increasing in 4Q21 after 3 quarters of increasing inflation and lower fiscal support payments.

Government unemployment insurance benefit payments have trended to near zero.

Nominal wage growth for the lowest income quartile is growing at the same pace as inflation.

2020 had large gains in real wage growth; so, even though real wage growth is severely negative for the past year, the 2-year trend is break even.

If real wage growth is -1%, it would take ~6 years to burn off the excess savings of the average bottom 50% of households.  Even at -5%, it would take over a year.

Job openings are at all time highs; so, wage growth should continue, particularly for the bottom 50% of households.

Spending estimates by all income levels, but most significantly lower incomes, are at record levels and inflecting higher still.

Average tax refunds are higher (due to child tax credit).

Greg R. · Answer

@Collins Bonnema great analogy about car dealerships. I hate when they ask me how much I want my payment to be. I always respond with I don't care about the payment; I'm focused on the total price.

You are 100% correct about wages not increasing to match inflation. Everything is so much more expensive now than it was a year ago. Gas, food/ drinks, entertainment, rents, services, etc. One thing is for sure, most "regular" people, (the non-investor type) are struggling. A majority of folks are living check to check, drowning in debt, and don't have enough money to cover a small emergency expense.

Not really sure how this is going to play out with RE. At the moment there seems to be an ample supply of people with buying power, but the rates could change that.

Collins Bonnema · Answer

@Greg R. great insight in my area cash buyers are for sure the minority and a lot of folks are monthly budget driven on what they can afford. A lot like walking into the car dealership and they ask about what you can afford to pay per month.

Wages aren’t rising with inflation so if rates go up to me prices have to come down some to meet what people can afford.

Greg R. · Answer

I have a similar thread going on this topic. The truth is that anyone's opinion is just that. My observation is that most people here don't seem to think that the rates are going to impact pricing much. One thing we can pretty much all agree on is that inventory is insanely low. In my mind that's the key. If we see inventory increase in the spring summer months like we normally do and the rates stay in the 5's or 6's, I think it's entirely possible that prices could dip. If that happens, the sellers would have no choice but to meet the buyers where they're able to qualify. Buyers using financing would have limited buying power due to high rates.

There are only so many cash buyers out there. Purchases using financing represent about 70-80% of home sales. It's possible that the rate increases could generate some more inventory as well. Some sellers seeing rates increasing could think that they need to list now before rates balloon out of control and while values are still high.

But who knows...

Russell Brazil · Answer

Cause and effect.

Prices are the cause, interest rates are the effect. Not the other way around.

The dog wags the tail. The tail does not wag the dog.

Rates are rising rapidly in response to the cause, prices rising rapidly.

At the all time high interest rate of 19%, prices averaged in the 3 year lead up to, and the 3 yeara following it 8% per year. This is because it is the price increase that caused the interest rate to ultimately reach that high, not the other way around.

Impact of interest rates on prices?

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