Update: Ratio Median House Price to Median Income (2008 Report)
Submitted by
CalculatedRisk on Tue, 06/24/2008 - 10:23am (95 comments)
in
Shopping at Amazon?
Wait! If you click on the Amazon banner link at the top of the page first, HCN will get a percentage of anything you purchase for 24 hours!
Open predictions
Our local book authors
User login
Who's online
There are currently 23 members and 145 guests online.
Recent Recommendations
I'm gonna buy a big house in Kansas!
I'll be first!
I'm gonna buy a big house in Kansas!
I'll be first!
This reminds me of that "Map of Missouri" from BusinessWeek that was going around a while back.
I am sorry to tell you, the increase in inflation is going to continue and these charts are going to see more declining values. I wish I could say otherwise, but I have an honest face and heart!
Re: `Our short-term outlook is for dollar weakness,'' said Benedikt Germanier, an analyst at UBS AG in Stamford, Connecticut. ``After today's data, the Fed has no reason to talk hawkish tomorrow.'' The dollar may drop to $1.60 per euro within a month, he said.
I'd like to see this graph further modified to include the effects of lower interest rates. It would remove a distortion, I know the rate I paid on my 1999 mortgage was quite a bit higher than the rate I paid in October of 07 when I traded up. Our family income is also up about 300% but that's a different issue...
http://datadepository.googlepages.com/pncbankletter001.jpg
REbear-Wow that's interesting..Credit contraction is really just heating up..Thanks, I'm heading to bestbuy now to run my cc up and cry to congress about a bailout later
These numbers are not home prices/values, right? How are increments valued?
Expert says worms and parasites drain U.S. poor
Business & Financial News, Breaking US & International News | Reuters.com
Think he is talking about CONgress.
Wall Street Should Avoid Fed `Dependence,' Ryan Says
Wall Street Should Avoid Fed `Dependence,' Ryan Says (Update3) - Bloomberg.com
MD owner, interest rates and housing are an interesting topic. House prices don't (or at least shouldn't) change directly because interest rates change - unless the change is a long term structural change.
Say you buy a home with an interest rate at 8%, and the rate drops to 6% when you go to sell. How much more should the new buyer pay because the interest rate dropped? The new buyer should consider not only the current rate, but what the rate will be when he sells the home. It gets complicated, but the actual answer is the interest rate doesn't matter (with a couple of huge caveats).
(Note: interest rates do have an impact on demand because more people can afford to buy - and an increase in demand does impact prices - so this gets really complicated).
REBear, that looks like the borrowerer defaulted. It's not exactly the nicest letter I've ever read - I don't think they want this customer back!
Best to all.
REBear,
Hehehe... If Option ARM was just as cruel...
Nice work comparing the Harvard and Yale (Shiller) analyses, sir.
Yep, the Left Coast is in for some tough, tough times.
thg, that is the Case-Shiller index. 100 = Jan 2000. (I forgot to add this).
Best Wishes.
Re: "It gets complicated, but the actual answer is the interest rate doesn't matter (with a couple of huge caveats)."
I have always been fascinated by future value assumptions and comparative values, in addition to the methods used by insurance agencies to gage replacement value. It often seems that by the time a valuation trend becomes predictable, it becomes like a magic trick that everyone is bored with, and thus people begin to look for new metrics that explain the old story in a new improved dynamic way.
I always wondered if there was a correlation between auto loan debt and housing debt, in terms of the present value of cash and Treasury yields, but then again, sometimes you have to let go and just go with the flow....LOL!
Excellent, excellent statistic. The prices in my neighborhood peaked at 7x the median. Now they are down to 4-5x, and they will probably settle around 3x, which is where the historic curve for Northern California has been for decades. Move to a place where the ratio is 1-2 or less!
The interest rate doesn't matter?!
Cue my head exploding....
The red line is the JCHS median price to median income ratio for LA.... This has fallen off a cliff.
So when does this start to affect people's psychology? "cuz I live in L.A., and RE (asking) prices are still at bubble levels. Candle shops and doggy day care centers are still doing a brisk business. Nobody really believes this is more than just a soft spot, and we'll be back to "normal" soon. It's surreal... :-/
jmay, interest rates do matter in some ways - but not in the ways most people think (unless there are a long term structural changes to interest rates). As I noted, lower interest rates increase demand (more renters can buy), and that pushes up prices. But the interest rate change doesn't directly impact prices (this shouldn't cause ones head to explode).
Best Wishes.
The dashed line is the monthly Case-Shiller mid tier price index. This has fallen off a cliff. It is very likely that the median price to median income ratio (on a monthly basis if it was available) would now be around 7 or lower - well on the way to the historical norm of around 4.7.
CR - What's the national historical norm, about 3 to 3.5? I ask 'cause I doubt my sleepy little river town has ever gone over 3X though some neighborhoods are almost 'city pricey' - they are just more than offset in number by beat up old wrecks like the one I live in.
Also - do you think there will be serious overshoot? If so how much & how long? TIA.
JBR, I went out to dinner last night and the restaurant was packed. What can I say? The only direct evidence I've seen of an economic slowdown is fewer cars on the freeway (well, and all the house For Sale signs - and For Lease signs on commercial buildings).
Best Wishes.
In addition to Dow's monster price hike, got a bit of love back from oil too:
August crude climbed 26 cents to close at $137 a barrel in New York Tuesday
I think there's still a lot of pressure on the Fed not to cut. Especially when you have prominent NBER economists screeching about stopping the rate cuts.
But what do they know.
7x
holy moly, you mean i was supposed toi buy the 2.8million dollar shack in ross?
Is this what your pears are doing?
Is this accurate thru the pay scale...say30k to 1mm$?
dryfly, based on the new Harvard data, I'd say 3 to 3.5 X income is about the norm.
Obviously some places will be higher (like coastal areas), and others lower (like the midwest) because of land constraints and zoning. Places like Cedar Rapids and Peoria were below 2 less than 20 years ago. It's hard to guess when they will get that low again.
I'm not sure how much we will overshoot to the downside. Probably not as much as some people hope.
Best Wishes.
Interest rates don't affect prices? I disagree. I think that is the whole basis of the worst housing bubble the US has ever experienced.
OT, from the WSJ$ site:
Chrysler Taps $2 Billion Credit Line
DETROIT -- Chrysler LLC, facing liquidity pressures amid a steep decline in the U.S. automotive market and rising commodity costs, tapped a $2 billion credit line made available as part of its sale last year from Daimler AG to Cerberus Capital Management LP.
.
.
.
A Chrysler spokeswoman had no immediate comment on what the money will be used for and why it was drawn at this time. Daimler reported the loan Tuesday.
TradingStats, this is median house - median income only. I would think price to income would vary widely across the income range.
I'm somewhat risk adverse, so I wouldn't be happy paying 4 or 5 times income for a house unless I made a significant down payment.
Best Wishes.
JBR, I went out to dinner last night and the restaurant was packed. What can I say? The only direct evidence I've seen of an economic slowdown is fewer cars on the freeway (well, and all the house For Sale signs - and For Lease signs on commercial buildings).
CR - We were talking about this a couple threads down... there hasn't been a lot of pain yet because the majority of firms haven't hit 'cash events' yet so o major job loses yet. Paper losses & write downs suck but don't change operational behavior (like hire/fire & open/close facilities) until the cash dries up. Then it is a firestorm...
Folks are certainly feeling it in the financial industry, automotive & airlines, RE - but it hasn't hit other services nor a lot of non-auto, non-HB mfg.
If this credit crunch is real - it will hit those other businesses too & hard... just a matter of when. IF the crunch is real that is.
Do you see any evidence of it? I am just starting to see things outside auto & HB really tightening.
I'm wondering how would one bring the LA ration below 5...
Say...
40% decline in the nominal house prices
5% increase in the real income
10% increase in the general price level (excld. housing)
over the course of five years. Is this a realistic scenario? What would be your scenario?
There are things we know we know. That is things we know but don't want inventors to know. Then there are things that investors know that we don't want them to know so tell them what we want them to know. Then there are the known unknowns which are things we don't know and don't want to know otherwise investors will know that we know - BK is inevitable w/o bail/buyout. - Wamu Woo Hoo!
wally, I thought I was clear that interest rates play a role in pricing, but how they work is generally misunderstood.
One of the reasons for the bubble was people only paid attention to their monthly payment, not the price. There were very few people pointing out this fallacy (actually I was pretty much alone at the time).
When I wrote in early 2005 how interest rates and housing should be viewed - heads exploded! Yet, I still believe my analysis was correct - and I think more people now understand how the relationship should work.
Best Wishes.
Interest rates don't affect prices? I disagree. I think that is the whole basis of the worst housing bubble the US has ever experienced.
I think what's far more relevant is real interest rates, not nominal interest rates.
IIRC real estate did very well in the 70s despite "high" interest rates because in real terms they weren't high at all (i.e. they were significantly less than the rise in house prices at the time, and presumably inflation).
and I guess if it's assumed that markets can stay irrational longer than solvency, why shouldn't people be the same?
Places like Cedar Rapids and Peoria were below 2 less than 20 years ago. It's hard to guess when they will get that low again. - CR
I lived in Cedar Rapids back then and large sections of town were 1X - seriously. The only reason the composite went 2X was because others bought acreages (say 10 acres) at 3X. It was almost laughable it was so cheap... I was making $30K as a fresh out of school chem eng and bought a nice home for ~$40K... circa 1983.
I had friends who were transfered to Peoria and told me the prices there were even lower...
This experience skewed my 'price expectations' for the rest of my life.
CR,
Would it be fair to rephrase your statement about interest rates as buyers aim for a monthly payment amount, and will buy as much House as they can. Thus, lower interest rates means higher prices.
Thanks,
doug
Screwed that one up . Never mind, you addressed it further down
I love those BP beyond Petroleum commercials. They give me so much hope...
CR, I too am having trouble with your statements about interest rates and house prices.
Rates affect house prices quite directly by affecting affordability. Buyers determine their purchase price based largely on their ability to carry the monthly mortgage payments, no?
I don't see this as a change in demand, but rather a change in purchasing power. The demand for a home only changes with social attitudes about owning/renting, and with perceptions of future appreciation (get-rich-quick).
Now if we see an environment where inflation explodes (in progress), mortgage rates go up (they are edging up), but global forces keep our wages down, then it will be interesting to see what effect that has on house prices!
doh didn't read your followup comments...
Totally agree.
Re: " I went out to dinner last night and the restaurant was packed. "
There has always been a correlation between service industry growth and GDP and thus the connection between burger flippers to home flipper ratio is telling!
I think we will see more burger flippers, more burgers, more risk, more debt. Interest rates are meaningless for all economic activities in this risk-adverse globalized environment, where people are hooked on eating expensive service economy food (on credit) and living from lotto to casino slot machines. The new generation is not correlated to the boomers in any way and this is one reason economic models are worthless and outdated; in an economic age of synthetic derivative Ipods, we have untold economic experts playing with economic models from The Leave It To Beaver Era! Retarded!
I have to agree that interest rates matter in the real world. I understand the argument that interest rates should not, in theory, matter, because assumptions about future interest rates would be priced-in today. However, I fear that argument assumes a level of sophistication far greater than that possessed by the average buyer. For example, the average Southern California option arm, stated-income buyer could not even price-in the contractually-set recast of their loan, which is a far easier metric to price than future assumptions about mortgage rates.
Further, that interest rates matter is supported by the fact that the average real (inflation adjusted), monthly mortgage payment had been basically flat for about 20 years until 2004 (in Southern California, about $2000 per month). It is also supported by relative compression in the median income/median price chart in high interest rate years (e.g., 1982 and 1983, when mortgage rates exceeded 15%) and marked elevation in low interest rate years (e.g., 2002 and 2003) (of course, other factors were at play during those years). The median income/median price data from 2004-on is in my view skewed to the point of worthlessness by the widespread availability of "affordability products."
Long and short -- I echo the suggestion that this data be adjusted for interest rates. . . .
And, of course, thanks for the great blog.
Would it be fair to rephrase your statement about interest rates as buyers aim for a monthly payment amount, and will buy as much House as they can. Thus, lower interest rates means higher prices.
But higher prices would mean that builders will produce more houses because it's more profitable, thus ultimately driving prices back down.
Furthermore one issue I think gets ignored is that if rates are high because inflation is high, that generally indicates wages are rising rapidly over the course of the loan. So it's reasonable to expect that the burden of the principal will rapidly diminish over time vs. the low interest rate environment where this typically wouldn't happen.
To put it another way, if your salary is going up 10% a year, you realistically can handle a much higher interest rate than if your salary is going up 2% a year because in real terms your debt burden is getting wiped away. And generally it is precisely these issues that are related to why interest rates are high or low -- the market (in the case of long rates) expects price increases to be relatively low or high.
Unless you have a nasty carry trade artificially pushing those rates down (like may be happening in Brazil et. al. right now).
How can median prices be 10 times median income? I just don't understand. So if I made $50,000/yr. then I'd buy the relative median house for $500,000? My monthly payments and taxes would be 100% of my income. Do these people just not eat or what?
Do these people just not eat or what?
Credit cards my friend
speed, neg-am oa
Come on, interest rates and bonds walk hand in hand and the rubes always buy and refi at the wrong time and in the subprime boom, rates were not that great to motivate the world to plunge into massive debt -- they all fell for the same game to get east ARMs and HELOCs and fell for rolling teaser rates into the long term trap. Get real, interest rates are part of the puzzle, but look at all the dopes that went from thinking of buying $175,000 homes in 1999, to a massive tsunami wave of retards that all wanted $400,000 homes in 2006......what changed...the friggin rates.....or the explosion in home costs related to 30 or 50 year mortgages that non of these retards could afford -- because they all got sucked into a HUGE con-GAME to pay 3 times as much for a home and then 30 years of higher INTEREST!
Probably not as much as some people hope.
Ah, CR, ever the optimist!
IMO probably more than people would even want to think about in bubble cities.
Again, the higher ratios associated with selected locales have been constructed & maintained via decades of equity trade-ups. Now that the median homeowner won't have any equity to trade up the median prices will be a more direct reflection of income.
Speed, that is what I pointed out in my previous post on this topic. People buying at 10X income (unless they make a huge down payment) are the definition of "house poor".
They must enjoy eating cat food, and never leaving their home - because they can't afford anything else.
Best Wishes.
"But the interest rate change doesn't directly impact prices (this shouldn't cause ones head to explode)."
CR, I understand your reasoning behind this statement, but I have never seen this empirically tested. I can only go with mine and many of my friend's and family's experiences, in that I believe it does for many first-time and stretched close to the max homebuyers. Most first-time (and a lot of other) homebuyers settle (not as large, not as many bedrooms, not as good as a location, not as much land, more fixer/upper work to be done) rather than buy their dream house. Consequently, monthly payments are typically how people choose what they can afford.
Many homebuyers choose the best house that fits their particular desires at the cost they can afford. And this is a substantively different purchasing decision than for almost all other consummables. For me, I don't buy the most car that I can afford, or the most expensive clothes that fit my budget. I buy what I like and what I believe has good value. But when I bought my house, and most likely when I buy my next house, I will extend the purchase price to what I can afford based on my annual/monthly income.
Implicit in my home purchase(s) will be my estimation of future worth. It has generally (but with lots of exceptions) been an appreciating asset, while virtually all of my other purchases have been perishable consummables.
Therefore, mortgage rates have a fundamental effect on house consumption.
but look at all the dopes that went from thinking of buying $175,000 homes in 1999, to a massive tsunami wave of retards that all wanted $400,000 homes in 2006
Funny thing about that was that they were the same homes!
I'm just wondering how much overshoot there is going to be due to people having to spend their money on driving to work rather than their homes when this thing all stabilizes.
Pay option ARMs allow you to buy at 10X and only pay at 4-5X, for a time.
"hey must enjoy eating cat food, and never leaving their home "
Meow! More wheat gluten please!
"Excellent, excellent statistic. The prices in my neighborhood peaked at 7x the median. Now they are down to 4-5x, and they will probably settle around 3x, which is where the historic curve for Northern California has been for decades. Move to a place where the ratio is 1-2 or less!"
Ehh. Pay the higher price and make it up in the heating oil you don't have to buy and the AC you don't have to run full-out four or five months of the year.
3X would be about half what of what's being asked for houses in my little corner of Norcal, and even those prices are down 15 percent or so from peak.
"I'm just wondering how much overshoot there is going to be due to people having to spend their money on driving to work rather than their homes when this thing all stabilizes."
My theory is that it may lead to a small bounce in areas closer to jobs. In LA terms, we see the IE tank while formerly untouchable parts of the valley do well. So long as gas stays above $4.
tj,
"Funny thing about that was that they were the same homes!
Totally! This was just a shuffle of money from one bank to another and an amazing tsunami of rubes all fell for this shit and just had to move up to that exciting dream home that was just a congame -- where the rubes handed over three times the money for the same catbox!
Why speculate on overshoot on the downside? GDP and incomes are going to be plunging, in parallel as the multiple is collapsing --> everyday low home prices coming to a neighborhood near you.
Interest rates affect housing prices but over the whole credit cycle not infinitely, instantly.
When rates are low people do buy more & push prices up but homes aren't that liquid so only a few turnover & the price increase response is 'damped'. Even though in theory the whole housing stock should move at the prices margins the reality is the turnover is slow enough that the whole curve moves slowly. That and the price information is transmitted imperfectly.
The reverse happens as rates increase - pushing home prices lower - again relatively slowly. Damped.
What happens is housing prices then tend to cycle between these bands but never reach extremes before the cycle reverses dragging prices the other way - like a damped sin wave.
Understand that in a 'normal environment' lending criteria doesn't change all that much just because rates drop - a few more folks can afford the payments given lower rates but the Tanta's of the world still make them qualify. Make them sweat.
That's the normal set of conditions... what happens if something weird is thrown on top of it all - like NINJAs & 100 LTV loans & the push to securitize? Then the Tanta's of the world are pushed aside & we have fog-mirror qualification standards. That crap had a bigger effect on this bubble than the low rates did. Rates were part of it but lax lending standards were even more at fault.
everyday low home prices coming to a neighborhood near you.
They are close to free in my neighborhood now.
Don't worry,
Most Americans believe that angels and demons are active in the world, and nearly 80 per cent think miracles happen, a poll has found.
Keep driving that hummer, grab a few more cheap McMansions..
About one in three people say they receive answers to prayer requests at least once a month and say they have experienced or witnessed divine healing of illness or injury.
insurance is for idiots...
We believe in miracles, say 80% of Americans - World - smh.com.au
CR is correct -- interest rates have not been the biggest factor in pricing, otherwise historically you'd have seen prices rise and fall with those rates.
You have to consider that expensive median housing is a relatively new phenomenon. For those that wanted pricier digs the downpayment was likely the principal roadblock in past decades, too.
What I would like to see in regard to a chart like this, is cost of living and a break out of stuff like local tax rates for property and sales taxes. When I think of California and foreclosures, I think of high cost of living as an offset for any future gain. The future value in these cases should be viewed in terms of cost of infrastructure and future tax liabilities which a homeowner may have to support.
In terms of bailing out banks and Fed cash for home failures, it may be a burden to be a homeowner and get stuck with higher taxes, on top of higher costs of living from stagflationary fuel and food relationships -- in an environment that may be impacted by increasing unemployment!
"80 per cent think miracles happen"
Maybe because the word "Miracle" is applied so liberally to news stories about anyone surviving anything on any given day.
Speed writes:
How can median prices be 10 times median income?
Median income is going to be of your whole working population, not the median income of homebuyers. The statistic is a great indicator, but I imagine that the median income of homebuyers is slightly higher than the overall median income.
Not saying it isn't completely out of whack with affordability, and the buyers aren't on average house poor, but you can't look at the two medians as directly related. They're not.
"In terms of bailing out banks and Fed cash for home failures, it may be a burden to be a homeowner and get stuck with higher taxes, on top of higher costs of living from stagflationary fuel and food relationships -- in an environment that may be impacted by increasing unemployment!"
That's the goal - make debt-serfs out of as many people as possible. Hang a big mortage payment around their neck and stick them in a no-benefits service-sector job for life, and you have complete control... at least until the rabble decide to start walking away! How dare they not accept serfdom! Terrible!
Once you are in a market like the bay area, it is easier to buy a house at 5 or 6 times income because you already have significant equity to use as a down payment. But it relies on a steady stream of move-up buyers who themselves have equity.
CR,
I think I do understand what you are saying - that there is an intermediate linkage (demand) between lower interest and higher prices, and that, technically speaking, it is the demand (which creates competition and bids up prices) that drives up the prices. Still, the enabler is the rates and the resultant is the bubble. But disasters never have just one cause and the over-willingness of mortgage issuers to feed this beast and the hubris of the CDO packagers to push their new 'invention' and the gullibility of buyers all have played their part.
d-, I thought you provided the cachet that kept home prices artificially high in your neighborhood?
"like a damped sin wave"
I'm kinda interested in that sin wave thing... even if... especially if it is damped.
"Maybe because the word "Miracle" is applied so liberally to news stories about anyone surviving anything on any given day."
A very logical-minded clergyman I used to know was once approached by a woman who was the sole survivor of a terrible accident.
"I think God meant for me to survive," she told him.
"So does that mean he meant for everyone else to die?" said the clergyman. His day job: corporate tax auditor for the IRS. Not Mr. Cuddly.
ps
the law covering sneak and peek is the patriot act
and the offenses do not have to be related to te-rism in any way.
sneak and peek warrants are allowed based on suspicion for far lesser offenses
sorry previous comment wont make sense cause i skipped down a thread
? I disagree. I think that [low interest rates] is the whole basis of the worst housing bubble the US has ever experienced.
no. it might have been part of it. but severely relaxed lending guidelines was even more important.
even a 0% mortgage pales in comparison to a neg-am 120% CLTV loan given to a person with a FICO of 580 and zero in the bank.
jg writes:
d-, I thought you provided the cachet that kept home prices artificially high in your neighborhood?
jg | 06.24.08 - 4:37 pm | #
Opposite - I & my spawn have done our part to assure housing stays affordable on this side of town - at least for as long as we stay here that is.
as for miracles:
did they specify religious miracles vs miracles in general?
because I've seen some miracles in my life even though I didn't think they were due to a higher being. (example: a person's chute didn't open at all, they fell over 8k feet hit the ground with completely closed parachute and lived)
not this lady, but similar:
FOXNews.com - Pregnant Skydiver Survives Parachute Malfunction - U.S. & World
Chairman Meow writes:
"like a damped sin wave"
I'm kinda interested in that sin wave thing... even if... especially if it is damped.
Chairman Meow | 06.24.08 - 4:42 pm | #
LOL - I guess I'm only used to seeing it with a "=" in front and "()" behind.
Plus I'm too old to have much exposure to the other 'sin wave'... that all ended in late 80s from what I can tell. Completely 'damped' now...
Dryfly wrote:
"=" in front and "()" behind
Don't worry that you are too old, your oldschool ASCII pr0n is awesome!
"When rates are low people do buy more & push prices up but homes aren't that liquid so only a few turnover & the price increase response is 'damped'. The reverse happens as rates increase - pushing home prices lower - again relatively slowly. Damped."
-dryfly
I agree with your analysis regarding interest rates and prices, however a significant IR change (up or down) in a short span of time will affect affordability nearly immediately for many, would it not? I'm thinking here of FHA income guidelines and lending standards returning to a saner pattern, etc. However, if interest rates continue to climb, that will change expectations and actually pull more fence-sitters in to buy woudn't it? In that case, somewhat higher rates and associated expectations could put a bottom to prices more quickly than otherwise, couldn't it?
CR
Getting in to the discussion kinda late.
But I wonder how the presence of non-documented home buyers affects the charts?
In my atypical town of East Hampton NY
housing prices have held firm. While theout have to town loathes meaningful statistics,bilingual kids seem to make up 1/3 of schoolkids. And these just about have to live in single or extended family homes. one member has to be at least reasonably legal. The rest not so
This would skew the ratios markedly.
Interest rates impact house prices?
Theoretically no: we should all be using a lower rate to get the discounted value of future mortgage payments when calculating the liability we are taking on.
Practically yes: it's hard to resist buying the best house allowable under the bank's rule that mortage payments cannot exceed, say, 30% of income.
Practically if the banks, 2004-2007, tear up the rule book and we lie about our income? Maybe 'no' again.
Interest rates do not matter?
30 yr is up about 3/4% over the last 3 months or so.
House prices will have to go down even more now to reflect this. At least I will rweflect it in my bid.
What is the nature of the median income figure used to determine the ratio, is it national median income or the median income in the city in question?
3-3.5x might be the norm if there are two earners in the household taking in decent salaries with no kids to support. With two kids, these folks will not be saving much money- been there, done that, speaking from experience. Having and raising children is critical for the survival of our nation! Keep jobs in the US, slap tariffs on all imports, and stop all immigration for 20 years, and we will return to 1950s-like prosperity!
CR,
Any chance that you could post the data? I'd like to take a look at Boston.
In that case, somewhat higher rates and associated expectations could put a bottom to prices more quickly than otherwise, couldn't it?
Doc at the Radar Station | 06.24.08 - 6:07 pm | #
Maybe - if only temporarily until the fence sitters are all off the fence. In a country with as high a home ownership rate as we have... are there more wanting to get off the fence & into a house... or out of the house & back onto the fence?
I think that is why you have to look at longer cycles to see the true price 'trading bands'.
JMHO.
Low interest rates only enabled speculation, to the degree that folks figured the home might appreciate faster than their loan costs -- I suspect this launched the feedback loop. The other loan terms were the real cause for home prices detaching from ability to pay.
Those other loan terms:
No down payment.
No income verification.
Negative Amortization Loan.
Interest Only Loan.
Feedback Loop Appraisals.
Cash Out At Closing.
Cut those out? Home prices would be unable to detach from ability to pay, at any interest rate.
Interest rates from what I recall are a function of the supply and demand of money. If CD's pay savers decreasing rates which are below the official core inflation rate which is now accelerating and 30-year fixed mortgages have rates that are also increasing without regard to what the fed is doing with the FFR... Are the banks doing the right thing by building their reserve cushions with this newer, wider spread? Despite that, how long can the Fed throw a lifeline to banks to make up for depositors who surely must be taking their money elsewhere to higher yields? It is obvious as apple butter that the Fed is creating an incentive to spend everything possible, flush out all quail at all costs. At what point can the banks be taken off life support and once again attract deposits?
I believe interest rates are a very important secondary factor affecting price.
Lower interest rates increase the price that the buyers are able to pay. So the fundamentally supportable price will rise or fall with the interest rates (all else being equal). However, all else is never equal, and the other factors (population, employment, confidence, speculation, supply) driving the market cycle are stronger than the interest rates, and will overpower the price effect caused by a change in interest rates. This is why we see prices rise dramatically in some places while rising only slowly in others with the same interest rates available.
Housing prices (like all prices) are driven by effective demand and supply. In the short run supply is nearly fixed. So effective demand rules the day. A decline in interest rates causes a direct boost to effective demand - buyer purchasing power. Home buyers will almost universally buy the most house they can afford on a monthly payment basis. Lower the interest rate and they look to buy more house. Unfortunately for the buyers, all of the competing buyers are also enjoying the lower interest rate, and prices get bid up accordingly.
However, this takes some time as prices are somewhat slow to react to the changing buyer purchasing power (up and down). So price increases (and declines) will lag the change in fundamental factors including interest rate changes.
A housing market with 4% mortgage rates is very different from a market with 14% mortgage rates. I have been a buyer in both such markets, and many in between. 14% interest rates kill prices, and 4% interest rates can be like gasoline on a fire. But you have to have a fire to get the effect. Gas does not burn on its own.
Or as is sometimes said - you cant push a string.
You know what has happened, is the dollar has aquired more value because of the insability of foreign currency problems and dependence on the oil/dollar (Chisteled is stone, with the might of the us military)backing!!!
"14% interest rates kill prices, and 4% interest rates can be like gasoline on a fire. But you have to have a fire to get the effect. Gas does not burn on its own."-Zephyr
To extend that analogy, would not unusually low interest rates increase the "inflammability", and once the fire begins it attracts its own fuel? I've got this theory that when interest rates are too low, the quality of the resulting investment is also lowered, and when they are high, the quality of investment (generally) increases. I just believe that using low interest rates results in a "dumb stimulus", that can create as much harm as good.
Property taxes are at least as large of a factor as interest rates. In California, the property taxes are fixed, which allowed the prices to go sky high. In New York, they are not fixed and they are also high (3-4%), which has helped to keep prices reasonable.
DK, Property taxes are still fixed in CA but prices are now dropping. A change in outcome with no change in the condition suggests no causation.
Pirces went sky high because of bubble thinking - betting on a continuation of rising prices. The Taxes were low for decades.
Greed drove the bubble. And lower interest rates probably contributed by enabling the fools to pay higher prices, but the bubble would have happened with or without lower interest rates. The peak prices would probably have been a bit lower.
Anon, 300-400k starter homes are not affordable with the tax rates in New York. To get the effective financial burden, just add the tax rate to the interest rate. In California, the property taxes rise very slowly when the property is assessed above the sales price- just 2% per year of the difference! BUT, the property taxes in California are allowed to drop proportionally when prices drop. I just received my assessment- it went from 388k down to 320k in one year, and my taxes are reduced accordingly. In New York, something entirely different happens. When property values drop, the tax rate goes up in order to keep the same amount of money rolling in. When property values go up, the taxes paid also go up. This serves to keep home prices low in NY. It also means that California schools will be in a world of hurt. Maybe they can save some money by sending the illegals back.
The problem with interest rates vs. taxes is that when the rate is low and the taxes are relatively low, it creates a condition that causes prices to spiral out of control. If either the interest rates are high or the taxes are high (or their sum is high), the median prices reach a ceiling sooner, which is defined by the median income. Also, houses that are paid off just have the tax burden, so the price on those homes is also held in check by high property taxes. It would be interesting to see a ratio of median property tax rate divided by median mortgage interest rate (assuming 100% financed purchases within the last 5 years) for different states.