higher rates guarantee lower prices?

If rates go up because of economic growth, then there is increase demand due to growth, and a dampening impact on buying power due to higher rates and the net impact is unknown. If the world simply pushes back on absorbing treasuries and mortgage rates rise due to the knock on effects of that, then prices should fall.

What is not debatable is that if you buy when rates are higher, you can enjoy the appreciation associated with falling rates. What is also clear is that price is forever, but mortgages can be refinanced.

Higher rates will make prices go up. Duh.

No empirical evidence by me but there is anecdotal evidence to suggest that increases in interest rates translate to higher mortgage payments and make it more difficult to finance a home purchase. Moxie would you argue that higher rates translates to real estate prices?

Right but if rates are higher in the first place because incomes are rising then who knows... Even if prices dont fall, the payoff of owning is better when rates are high. Simply speaking, rates are the return on putting cash to work...and putting it to work in a home is no different.

If demand outstrips supply, then rates wont matter until they got high enough that people would not want to buy. The value of real estate is the sum of many different components, some tangible (rates) some intangible (belief that prices keep going up).its a known fact that an asset which has to be financed, becomes more expesive as financing becomes more expensive. Based on that, RE should go down in value as rates go up. Bu theres much more to it....

"Moxie would you argue that higher rates translates to real estate prices?"
I'm not sure i understand the question there?? but i have asked 2 questions and am curious if anyone knows the answer to them?

my question is simple has this relationship historically always been true in the U.S? With higher interest rates is price depreciation guaranteed?
with of course the caveat...

Please provide empirical data to go with your point of view.thx

Moxie, you want to know if real estate price appreciation is correlated with the level of interest rates. Microsoft Excel has a number of useful functions. The data is widely available through OFHEO stats and history on the ten year treasury)

Based on that, RE should go down in value as rates go up. Bu theres much more to it....

now Marco_m is cooking something in that "thought" kitchen...times of high inflation coupled with rising rates...hmmmm?

and thx for the Excel tip Riversider.. i was actually asking anyone who felt it was an uncomplicated directional effect(rates up prices down, rates down prices up) to back up their pov with data

If interest rates are higher due to inflation than the value of "hard assets" such as land/property/commodities etc will also rise. Additionally, if inflation is the driver of higher interest rates than a fixed mortgage payment is necessarily lower in "real" terms.

So the real question is what will be the driver of higher interest rates, if you can answer that you can answer your question.

Oh my lord. How about a little reality check - we're still in a deflationary (opposite of inflationary) economy and mortgage rates are about to go up 25-100 bps (5-20%) in the next 1-3 months. $1 to the genius who can figure out what this will do to prices over the next 6-12 months.

Prices fall when money cost rise, all else being equal. All else is never equal, therefore go on your own empirically definitive wild goose chase, Moxie.

nyc10013. If you are that sure of your outlook, you should look into investing in inverse io's, or interest rate floors. If you are correct you will make out.

what do you think will make the printing press stop? healthcare - check, loss of fed independence - check, most dovish fed chairman, president, congress in history - check. You can keep your dollar

Mortgages can be refinanced, but not for free. With a 2% lower rate being the rule of thumb, it can take awhile.... And in NYC there's also the ugliness of the mortgage recording tax (or finding a workaround with lots of paperwork) that currently applies to condos but could eventually apply to coops.

People who buy at 6-7.5% interest rates may never have a really cost effective refinance opportunity.

Who cares?

NY does have the mortgage recording tax. Makes it more difficult to recoup the cost of refinance. Federal government grants the interest rate tax deduction and NYS/city takes it away with the recording tax.

Ever heard of Fed MBS purchases? $1.25 trillion? About to stop?

not. going. to. happen. when the buyer disappear, they will buy again

"Prices fall when money cost rise, all else being equal. All else is never equal, therefore go on your own empirically definitive wild goose chase, Moxie."

exactly why i don't need to go on that chase Rhino..just like to bring up the inane judgement of those who believe in absolutes..there have been several instances of prices rising with rates and prices declining with rising rates..rates alone clearly don't determine the price direction of the market

You don't have to pay the NYC/S mortgage recording tax on a refinance. You can assign the existing note to the new lender and avoid the tax on the current loan amount. If you were to increase the loan, then only the new money would incur the tax. The cost to do this is a few hundred dollars, which is a heck of a lot better than 1.925% of your loan amount.

Are we Nominal or Real Interest Rates. Even if we have some diinflationary forces near term the massive Gov't borrowings does not bode well for rates. Plus when the dollar depreciates against the Chinese Yuan and Chinese labor costs go up due to inflationary forces over there, we'll be sure to import the resulting price increases...

nymortgage. the lender has to agree to that..it's no slam dunk

Riversider: True, but there isn't a lender I can think of that doesn't allow them. They're fairly easy and take 2-3 weeks to complete. I can tell you that virtually every refinance in Manhattan is done using an assignment, except for some extremely rare circumstances.

If your dealing with a bank that doesn't allow them, you're just dealing with the wrong bank.

i've done assignments on 3 re-fi's. it's fine.

here is a study cited by many done solely on home prices/interest rates in manhattan..study covers 1975-2006

http://www.quadlet.com/RE/REReport.html

One thing that seems to accompany all thoughts on this thread is the idea that economic activity is the push for interest rates.

There is another notion that falling credit-worthiness (also known as max out debt load) on the part of Uncle Sam could provide the 'push'. Or that the FED may have no choice but to monetize the debt, destroying the value of the dollar by causing a capital flight.

There is more than one reason why interest rates might rise and they will have different effects on fixed asset prices.

The point is that all other things being equal, higher interest rates lead to lower prices. Its straight math. The amount you can afford off the same payment is reduced for everyone.

The challenge is, "all other things being equal" just doesn't really happen. Interest rates because of many other factors, each of which can be augment the effect, stay neutral, or even override it.

But if interest rates jump and there isn't some other major factor the other way, except further price declines.

"If interest rates are higher due to inflation than the value of "hard assets" such as land/property/commodities etc will also rise. Additionally, if inflation is the driver of higher interest rates than a fixed mortgage payment is necessarily lower in "real" terms. "

Of course, in that situation, the real value of homes gets REALLY whacked.
Not to mention stocks generally get a bump as well, given pricing increases.

So, that situation would not be good news for buyers.

Banks have a vested interest in saying no to mortgage assignment when it is to another bank. Personally aware of very large bank not agreeing to this pre-bubble.

assigning existing note to a new lender (last time I did it was Chase to Citi) is a gigantic pain in the tail and takes a lot of hassle -- if I remember correctly, added 30 days to the process. Not a slam dunk at all.

ali r.
DG Neary Realty

Seeing no one is apparently checking out the manhattan specific study done over a 30yr span correlating price with interest rates here is the conclusion..

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.

"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."

The mistake here is not removing other factors. Its not that the data doesn't support it, its that you don't have the correct data/analysis.

not to mention, we had a string of decades of rising prices, and decades of falling mortgage rates. Exactly what bunch of monkeys is doing this "analysis".

I'm guessing that due to your posts being 4 mins and 6 mins after mine you didn't get a chance to check "the monkeys" work. Perhaps you should take the ten minutes (or so) to review the data...or just flippantly call it all B.S without perusing it at all..

moxieland

To your original question,while I don't think anyone can guarantee it, but it's gravitational affect to pull prices down, particularly in our current climate nearly does.

Non empirical,but certainly nuts and bolts for a snapshot today,and since so much weight is put on what someone can actually afford to pay based on their income;

Let's say today at 5% interest you take a mortgage for 1 million dollars,and forgetting principal, your monthly interest nut is $4,166. If interest rates went up 1%, that puts you at $5000 per month. That's an extra $834 per month.....20% more than at 5%. How could it not affect what someone would and can pay for like kind?

"I'm guessing that due to your posts being 4 mins and 6 mins after mine you didn't get a chance to check "the monkeys" work. Perhaps you should take the ten minutes (or so) to review the data...or just flippantly call it all B.S without perusing it at all.."

I actually missed the link the first time... I thought you hadn't posted it.

But, looking at it, this analysis is, yes, horrifit.

Look at 1980 to present. The blue line goes all the way from the top left to the bottom right.
The red and black lines go up SEVERAL TIMES OVER in that period. The black line goes from the absolute corner, to nearly the other corner!

Not to mention, the guy uses average, not median price.

This guy would have failed Econometrics 101.

actually a very fair point truthskr...in fact in the cited study (should check it out it is brief and interesting) the author makes the point that with rates low(5%) a 1% increase makes for a significant 20% difference...where that same 1% move with rates at more of an historical avg(8%) makes a much smaller difference..even with these facts the charts, graphs show some very counter intuitive results

ok somewhereelse now take a deep breath and go back and read all 4pgs not just the first one...if you find it all useless i won't be shocked...what would shock me is ANY empirical data accompanying opinions..this data is not mine i don't claim to agree with it but it is at least based on information and not just opinion or conjecture...Noah could you please chime in!

I did read it.
Moxie

Of course I'll avoid trashing the validity of corcoran reports pre-acris as corcoran's report does not list their source for their 30 year numbers. :) But I think a major missing component to the study you cite which would likely affect the variations on the "theory" of correlation between interest rates and prices is the changes in household income.
Tax structure and changes are probably an even higher indicator missing from the data.
You might enjoy this read from Massey Knackal.
Though multi family specific, there is some nice insight into various periods of history and it's affects.
http://www.masseyknakal.com/chairman/634043355622750061.pdf

And BTW, your cited study talks a lot about 1999. Don't forget this was the peak of Dot Com stupid money coming in.
I think the rise in income and 401K values had people throwing caution to the wind and trumped rising mortgage rates.

here were some accompanying comments made by a few "monkeys" in response to the study from Time.com dec 2008

Some economist question whether the lower mortgage rates would even boost sales or home values. A 2006 study of mortgage rates and New York City housing prices going back to 1975 by Lucas Finco of Quadlet Consulting found no correlation between lower mortgage rates and higher housing prices, or vice versa. "The relationship between mortgage rates and home prices is pretty obscure," says Jack Guttentag, a professor emeritus of finance at the Wharton School of Business.

James Hamilton, a professor of economics at the University of California, San Diego, says he used to think that lower mortgage rates were responsible for rising home sales in the first half of this decade, and for that reason he projected home prices would rebound in 2007. He now says rising home sales were the result of deterioration of lending standards and not lower mortgage rates. "I was wrong. The real story with home sales has to do with the availability of credit," says Hamilton. "And credit is tight no

Read more: http://curiouscapitalist.blogs.time.com/2008/12/05/what-exactly-do-lower-mortgage-rates-get-you/#ixzz0jhA2QSig

and thx truthskr i will check out the link u sent...find this topic more complex than expected

"ok somewhereelse now take a deep breath and go back and read all 4pgs not just the first one...if you find it all useless i won't be shocked...what would shock me is ANY empirical data accompanying opinions..this data is not mine i don't claim to agree with it but it is at least based on information and not just opinion or conjecture"

My analysis is based on the same data! These guys just have fairly lousy premises.
Its no more opinion than theirs...

"My analysis is based on the same data! These guys just have fairly lousy premises.
Its no more opinion than theirs..."

you are truly a funny guy...who's on first? what's on second? i don't know is on third?
who's on first? yes who is on first.....

I'll tell you what(he's on second)...here is a simple request for you somewherelse show me some DATA (that you have found) that shows we have had "a string of decades of rising prices, and decades of falling mortgage rates."....and no the data in the link i gave you shows 10 changes in rate direction btwn 1975-2004 so it won't work

"Of course, in that situation, the real value of homes gets REALLY whacked.
Not to mention stocks generally get a bump as well, given pricing increases.

So, that situation would not be good news for buyers."

Not necessarily, if all the inputs (steel, lumber, labor, etc) are higher then the value of the home will be higher. Rents will be too. The home owner would be the one with the fixed cost of shelter, not the renter

"Not necessarily, if all the inputs (steel, lumber, labor, etc) are higher then the value of the home will be higher."

Which is exactly why most properties are valued using the "replacement cost" approach, most stocks are priced at the value of the corporation's assets................ sure.

I figure housing prices are more closely linked with GDP. More income, higher payments, higher prices. But with prospects for GDP looking bad, and rates likely to move higher ('cause there ain't no lower), a unique situation is upon us.

All the while the balance sheet is left unnoticed. The analysis has many moving parts, not just rates, but few appreciate the whole 'equation'.