Zooming interest rates = sinking prices?

We are just now returning to nominal levels of 2003-2008. Before that they were significantly higher. If you are expecting a negative response at this level you might be waiting for a while. In fact, it may temporarily have the opposite effect and push some off the fence. If you are suggesting lower prices due to rates at this level then we all should be factoring this in to the comp numbers for previous years.

Lets say a $1M property from last month when rates were at 4.8% has a comp of $750k from 2005. If rates were 2% higher in 2005 doesn't this suggest the comp number should be adjusted upwards? And then while you're at it, shouldn't we also adjust for inflation?

i took out a thirty year conforming fixed rate loan in 2004, 5.75% Rates were really low while Greenspan was driving the bus. Not recent Bernanke low, but still very low.

joedavis, I'm glad that you think this is all part of a Obama-Geithner plan, and that they have somehow their hands on a powerful, all controlling knob that they turn at will. And that the economic markets respond to that knob. Some of us are not that optimistic. For me, this (and many other problematic developments brewing) are just unintended consequences of all the unprecedented measures taken, and their possible undoing. As for NYC RE: ask LICC comment, I'm sure he'll have an answer.

and spin, only if you think there's been wage inflation among those who have bought and will be buying.

tromp, i agree with you. the horses have fled the barn. who knows which pasture we'll find them in, if indeed they can find a pasture.

your last sentence, brilliant.

spinnaker, since you're being so meticulous trying to adjust everything, which at face value sounds like being reasonable and fair an expecting RE markets to behave likewise, why don't we adjust everything to the supposedly basic factors? Let's say average wage increases in the city from 1999-2009, average buy/rent difference 1999-2009, and average RE bubble inflation 1999-2009. What you'll see is that nominal wages probably went up 30% compound, if that much, during that period. RE in Manhattan went up about 200% and rents probably 120%. Yes, I'm pulling numbers kind of out-of-my-derriere but they're not totally misinformed. Point is: when you throw in the size, breadth and complete nonsense of the bubble, all other variables are very secondary. Rates at 5% or 8% don't make up for the difference and don't even have that much of an impact. But yes, people are incredibly stupid some times and some will panic and buy, following the time-honored realtwhore motto "buy now or be priced out forever", because they will be afraid of interest rates shooting up. I personally prefer rates to go up because that tells me that come 2011 or 2012 the process will be done and NYC RE will be down 50-60% off its peak. That, or I'm losing my mind.

Increased rates as we are seeing now are not going to move sales one way or another. these rates are historically low still - and if the buyers at 5% cant do a deal at 5.5% they shouldnt be buying anyway!

all kinds of inflation except wage inflation. with unemployment where it is, wages arent going anywhere for a while

yep. it's complicated. inflation, discretionary income, availability of credit (not only cost) are all key. adjustments will be made not only in price but also on volume of transactions. the mkt can become more illiquid the less sellers adjust pricing.

alpine will say "prices rise when interest rates rise! and that makes crime go down."

did you know he lives in New Jersey?

rates are roughly the same today as they were in 2005. And in which direction were prices headed in 2005 class????

too bad they had to go and revive those pesky underwriting standards. killjoys. how's jersey alpie?

A really big jump will be a disaster for the market and the economy. How this gets played might set the economic pace for recovery. It's going to take more that a rate to alter the market. It's going to take another price drop. Now come the long hot lazy day's of summer. When you unemployed friends say, "screw it...I'm going to the beach every day this week" is the sign we are waiting for. Sales in RE this summer will be at a snails pace and by August/September there should be some spectacular deals.
Now let me throw that coin in a fountain.

"rates are roughly the same today as they were in 2005. And in which direction were prices headed in 2005 class????"

Wow this is a fucking brilliant statement.

and why is that? Instead of using 1 line insults, how about we back up our statemetns with facts for a change?

"rates are roughly the same today as they were in 2005. And in which direction were prices headed in 2005 class????"

i remember 2005..that when ML , Bear and Lehman used to still exist. memories....

The unemployment rate is roughly the same as in May of 1982, so I'm sure the B-52 will have a #1 hit this summer.
The US deficit this year is the same as percentage of GDP (13%) as in 1942, so I'm sure will invade Guadalcanal pretty soon.
Today I ate a big Mac and fries like I used to do when I was 15. I'm sure it'll make me as slender as I used to be back then.

Alpine, to say you're the most mindless, idiotic, and predictable RE troll to ever roam this board would be a compliment.

5.5% isn't exactly booming interest rates...The president won't let them get much higher.

its gotta happen sooner or later.

5.5% is indeed low and I can't understand why people are b*tching about it. Let's not forget that not too long ago we had double digit interest rates.

Does anyone remember back in fall of 2007 when the stock market would knee jerk upward everytime the Fed lowered the going rate?

I wonder what will happen to the Dow when rates start to ratchet up? Or maybe that eventuallity is already priced into stock prices???

The difference is 5.5% 2009 is not the same as 5.5% 2005 due to actual credit standards being put in place today so comparing today rates to "bubble" rates is comparing apples to oranges...

"The president won't let them get much higher."

The anointed one can do many things, but this he has no control over....if the Fed even announced they we're going to purchase more MBS/Treasuries than the already announced ones to get the rate down (which they just said they wont do), you can forget about the $$$ and that will have major consequences on other things....which in short will just push rates up anyways due to unintended consequences...

But don't worry, you'll have another crack at lower rates....when we get on with the other side of the "W" recovery that looks set to hit right about July when they realize there will be no 2nd half recovery....

It's not how long they have to stay up, to a large extent, it's how much they go up and if it is perceived as "enough" to make buyers less willing to make purchases. It also depends on what buyers as a whole expect rates to do in the mid-term future. If buyers expect rates to come down, it will make many wait to purchase until their expectations become reality. Similarly, for buyers who are "on the fence" and perceive rates going up, it will hasten their buy.

However, when you have "sea change" rates in either direction, it has ALWAYS effected both the volume and price of transactions, and I don't see how there's a good reason to believe that this would change if we saw very large rate movement again. Especially in a market where there is a decent amount of downward pressure (like now), if you piled on a big increase in rates, I don't think enough people would think of purchasing RE as a hedge against inflation because they wouldn't be able to afford any type of housing which they would consider living in due to affordability issues, and if you can't afford a house which you think you could live in, having the hedge against inflation is outweighed by not having a decent roof over your head.

"The president won't let them get much higher."

Right. They are going to make the Fed Funds rate actually negative: they are going to PAY banks to borrow money in order to drive down mortgage rates.

wrong wrong wrong...this is not a push some off the fence rate hike. this is a rate hike that will terminate a ton of contracts, that have been signed with mortgage contingencies. the fact is that a lot of these buyers who are absorbing product these days, are really stretching to own. and many of them have justified there purchases due to the low interest rate environment. don't expect the recent move in interest rates to have little to no effect. it is just another variable to contend with, such as the property tax increase. together these variable due add up. i think the recent jump in interest rates is worth another 2%3% down in price, don't you? and don't start calculating, this is a psychological thing as much as it is a dollars and cents variation.

sorry lets of spelling and grammer errors...freestyling a bit.
should say 2-3%...

For most consumers the bottom line in buying a house is "do I feel secure in my job and can I afford the monthly payment". We have an environment of high unemployement, rising interest rates and taxes and decimated retirement accounts.
It's a great time to buy real estate!

Methinks if the dow drops when/if interest rates rise, that will make folks feel poorer to boot, exacerbating the presure on prices...

Methinks if the dow drops when/if interest rates rise, that will make folks feel poorer to boot, exacerbating the presure on prices...

Here is an interesting analysis of the question: http://www.quadlet.com/RE/PrintREReport.html

5.5%? I was just quoted 6%. Rates have jumped nearly 1% in a span of 2 weeks.

check the jumbo rates guys -- if you want to see what most of us in NYC are looking at.

What do you guys think of this study?

http://www.quadlet.com/RE/PrintREReport.html
Are Real Estate Prices Dependent on Mortgage Rates?
An article by Lucas Finco
Quadlet Consulting, New York, NY
lucas@quadlet.com
Published on Wednesday April 12th, 2006 9:36 am ET

(New York, NY) A clear relationship between interest rates and the health of real estate markets is assumed by many in the media. For example, here are some articles that reference a connection between interest rates and the real estate market:
Realty Times
BBC News
REIClub
Market analysts and financial gurus repeatedly quote that an increase in interest rates will slow the real estate market. I wondered, is this really true? Does the health of the real estate market really depend on the value of interest rates, or a change in interest rates? For instance, lower rates would seem to correspond with higher growth of real estate, but in some situations, such as in 1999, a strong, growing real estate market was matched with rising interest rates. What does the data say?
I decided to use data from a large, closely watched market known as Manhattan. The Manhattan real estate market is an excellent market to study, and has data readily available. I used the data from Corcoran’s annual report which included data going back to 1974. I also used mortgage rate data going back to 1972, which is available from the Federal Home Mortgage Corporation. CPI Inflation data was also obtained, to adjust for inflation of the dollar, from the US Dept. of Labor Bureau of Labor Statistics. In all, I obtatined 30 years of data for the investigation.

Plotted in black is the average sale price of a Manhattan apartment over the last 30 years. Inflation adjusted data is in red. The 30-year mortgage rate is shown in blue. The market crash of the late 80s is clearly visible. Interestingly enough, according to the inflation adjusted data, the market has yet to recover fully from that decline. The decline of real estate prices in Manhattan after 9/11 is also visible in the data.

It is not really clear in this graph if there is a clear relationship between interest rates and prices for real estate in Manhattan. So, let's see if we can make a graph that will give a clearer view of the data.

In order to get a better idea whether or not we have seen a relationship between mortgage interest rates and real estate prices in Manhattan, let's look at the rates of change per year, and plot them against each other. With this plot, we expect to see a large rise in prices when mortgage interest rates drop, and a drop in prices when rates rise.

There's a lot of information on this graph, so let's take a closer look at a single data point. The point in red is for the change over the years 1999-2000. The 30 Mortagage rate rose from 6.8% to 8.2%, or a 1.4% rise, while the average price of a Manhattan apartment rose from $368,000 to $438,000, or a $70,000 rise (in 1982 USD). This places the red point in the upper right quadrant, with positive interest rate growth, and positive real estate price growth.

So, according to our expectation, we should see all the points in the upper left quadrant, where prices are rising and rates are dropping, or in the lower right, where prices are dropping and rates are increasing. This we don't see.

It's interesting to note that only four of the points are in the lower right quadrant. These four points are years where interest rates were rising, and real estate prices were falling. Compare this to the quadrant above, where rising interst rates were concurrent with rising real estate prices. There are eight points in this quadrant, almost twice as many as in the quadrant below. This data shows that rising interest rates do not always correspond with a drop in real estate prices. Just don't tell the Fed...

Well, this graph is great, but I'm a little disappointed. I was hoping to see a real relationship between prices and rates, but I don't see much here. I was hoping the points would fall on or near a line, and this would give me some insight into how the market reacts to interest rate changes, but it's not here. Why don't we dig a little deeper... To get a little deeper into this problem, I'd like to look at the price sensitivity to interest rates. One could argue that, when rates are low, prices tend to respond to a rate change more than when rates are high. So, let's test this hypothesis with the data.

Below I've plotted the price sensitivity to interest rates against the value of the interest rate.

Here's how I obtained these points. Let's take a closer look at the point in red , which is again for the year 1999-2000. To get the sensitivity of price to interest rate changes, I took the change in the price from year to year and divided by the change in interest rate for the corresponding year. So, for our point, the change in real estate prices was a $70,000 rise, divided by a 1.4% rise in rates. This gives a sensitivity of $48,814 price increase per % interest rate increase. In other words, it's how much prices moved that year per one point interest rate move. That year prices went up, and interest rates went up, so this produces a positive sensitivity to interest rates. At the beginning of 2000, interest rates were at 8.2%, so this is the horizontal value for the red point.

I should also point out that the two very high points and the two very low points correspond to years when interest rates changed very little, so when you divide by a small number, you get a rather large number.

So, what do we see in this graph? We said that prices could be more sensitive to interest rate changes when rates were low. This we don't see. This is what we set out to look at on this page.

In fact, if we believe that rising interest rates correspond with lowering prices, and lowering interest rates with rising prices, all the points in the above graph should be negative! This we also don't see.

Again I am rather disappointed that we don't see some sort of sensitivity to interest rates. One would think that the market becomes more sensitive to interest rate changes at lower rate values. For example, if rates go from 4% to 5%, that's a 25% change, but if rates go from 10% to 11%, that's only a 10% change. But, we don't see this in the data.

So, what can we conclude?

The 30 years of Manhattan data provided an interesting data set to study real estate prices. We looked at the relationship between 30-year mortgage rates and the average price of a Manhattan apartment over this 30 year period in the hopes of showing a relationship between the two quantities. The data did not support the usual claim that rising interest rates causes a decrease in market prices, and dropping interest rates causes an increase in market prices.

Why might this be? Well, the psychology of the markets is not the same as the psychology of people. While the assumption about interest rates affecting real estate prices might make sense for an individual, there are other factors involved. Other factors that influence the real estate market could be the health of the economy, supply and demand issues, local variability, taxes and maintence costs, transaction costs, savings rates, etc.

Please feel free to email me with any questions or comments on the above article, I look forward to hearing from you.

I am not sure I buy QUadlet's analysis. Essentially he points out that there are likely many market factors that determine prices, and if you simply use one of them -- interest rates, then there is no clear explanatory relationship. This is an obvious point. However, if you control for other variables, then one would like to know the effect of interest rates. This is an artificial analysis since all other things will and do change.
In the current situation, most factors that control price point downwards, so lower interest rates have to be considered a stabilizing influence. If you raise them by 1 to 1.5% which is what we are looking at, then the question is what this does to the buying psychology. The market is currently heavy with first time buyers, or buyers who are being drawn in by the recent price cuts from a record rally in house prices. Many of these people will be attracted to reach and try for houses they were just qualifying for given the low interest rates. At least that margin is now thinner and their ability to buy will be lower. There is consistent sentiment that appreciation in the next few years will be low. IN this setting, anyone who does not "need" buy something now will not see any advantage to buying at this point, purely on an economic basis.
This is fundamentally different from dropping down to the current interest rate from a higher or similar rate in 2005-6, with the market psychology supporting strong appreciation in the next few years.

Tromp:
Obama-Geithner are indeed turning the knobs -- they have control over the banks, and a plan in mind. On the other hand, I agree with you that they cannot predict the outcomes of their measures, and will look to tune things. All this poking around may not translate into anything positive in the long run.
The consensus at the highest levels of the financial world is that we'll emerge with a positive but different economy in 3-4 years. Stagnation till then at best.
Buying is not being advised by these folks under these conditions.

Joedavis, I just don't agree. My confidence in the "highest level of the financial world" is akin to my confidence in, say, the NY Knicks management. Actually I probably trust the NYK more than Wall Street right now. And I don't mean that in terms of honesty, fuck honesty. I mean it in terms of reasonable, cautious, well-informed, long term planning. They got themselves in a hole that could and should have blown them to smithereens. Only the dubious theory that they are "too big to fail" saved them, if they are indeed out of the fire already, which is unknown. Any kind of economic picture except for absolute Armageddon would be "positive" considering where we were in Oct 08. But I don't think that it is in the hands of Geithner as much as in the hands of Hu Jintao and our creditors.

tromp:
Let me clarify -- turning the knobs does not imply that they will shift the position to the desired position. I am just trying to convey that the rate dip/hike is part of their strategy and they are able to exercise this level of control at this point.
The comment re "consesus" is drawn from independent conversations with 3 people right near the top in 1 bank, 1 financial company and 1 re-insurance company. Obviously can't name them. I think the best way to take their comments is that this is their hope -- i.e. I agree with you, and I am trying to convey that they actually do NOT expect any improvements for almost 3-4 years. Each advised me that this was NOT a time to buy. So, their hope and their advice need to be jointly interpreted.
So, actually in terms of the substantive direction I agree with you.

the government no longer has control over rates and that is evident in the rise treasury rates. we are at the total mercy of foreign creditors who are growing weary of our relentless borrowing.

Joedavis - I feel a similar aversion to investing in the three wise men's companies as they do about buying real estate. I wonder how accurate their crystal ball was a year ago and is this now the basis for trusting in their advice.

spinnaker -- are you saying that it is a good idea to buy real estate in this climate? or simply that you would not invest in their companies? The latter I understand. Each of these people is a long term personal friend, and I don't think their opinions represent the company's opinion.

My interpretation is that they feel the economic conditions are sufficiently unsettling /unsettled that one should wait to buy real estate. This does not seem unreasonable.
Asian stock markets have gained 60-100% in the time that the Dow has recovered 40%. So, if it were a purely investment question one would need to look at broader issues than what we are discussing here.

marco -- maybe the market has no control by the govt or this is a strategic move

I would never suggest buying or selling to anyone. It is a personal decision where economics are only one piece of the puzzle. People often forget this.

interest rates are staying up
contracts signed seem to be steadily decreasing
as are new listings and inventory is shrinking

if you are a chartist -- price reductions should soon follow?

Are interest rates coming down now?

Yes, interest rates have come down a bit recently.

"Yes, interest rates have come down a bit recently."

Not after today's 10 year fiasco

garelj is right. They are going up again. They'll probably end up flat week-over-week.