Interest rates not linked to housing

stop drinking that juice... oh wait, stop listening to the morons that drink it.

after looking at the first chart, you know this guy has no clue. there was a significant drop of prices from late 80's into early 90's. that chart is showing a slow rise. time to get back to reality.

JM..great link. The reason higher interest rates = higher home prices is b/c higher interest rates mean the economy is strong meaning increased wages/compensation which more than offset the interest related mortgage cost increase.

higher interest rates = stronger economy = higher compensation = more disposable income = higher prices

JuiceDrivel.

ab, there's a minor dip and leveling off during that time period on the chart. It's there, but perhaps looks rather insignificant when you have to plot out the insane bubble pricing since? I wouldn't dismiss the article so casually. I've often found the "higher interest rates means pricing will crash" theory a bit too facile, even though I agree with the logic. That said, history doesn't guarantee anything, and the author himself says: "So even though history doesn’t show us a clear negative correlation between rates and housing prices, we might surmise that the credit cycle may need to contract to reach a stable footing. If the current mix of home prices and savings levels require buyers to rely on mortgage debt that they might not be able to afford at higher rates, then we may finally see conventional wisdom meet reality."

Also from the author, in the comments:

"Agreed that the title is preposterous! The editors modified my original title, which was a question of "how" interest rates impact home prices.

Rates certainly effect individual buying behavior in the short run, but my big point was that there are many more factors that play into real estate economics. The message is that the world won't end if/when rates go higher; people will still buy homes."

bjw, there was a crash of prices of 20% or so in the late 80's to early 90's. that flat blip does not display it. it shows more of a 2/5% lowering and then immediate slow increase. this was not the case during that period of time.

ab, I don't think it was quite 20%. If you're going to nitpick on the chart, I'd be more concerned with 1920-1940. It's been flattened to death! I think this might be a case of this bubble distorting the chart so drastically, that we're seeing a bit too much forest, and maybe not enough trees.

Here's an arguably better chart (Shiller). Seems like the article's conclusions more or less hold, no?
http://www.ritholtz.com/blog/wp-content/uploads/2008/12/case-shiller-chart-updated.png

I dont know who's been saying a rise in interest rates is going to a cause a crash.
It will most certainly negatively affect pricing.

It's also hard to discuss data that isnt properly sourced or verified. A quick small nitpick is that it's not inflation adjusted.

BJW
I would argue it's not a better chart as Ritholtz has been specifically called out on poor data source.

"Update #2: I contacted Barry Ritholtz about the issues with the graph. He then contacted Steve Barry. It has been confirmed straight from the horse's mouth, from 2006 onward the disputed graph uses the S&P/Case-Shiller 20-city index, rather than the national index that Robert Shiller used, and it does not adjust for inflation. This graph is really making its way around the web, which is unfortunate because it is worthless"

http://blog.jparsons.net/2011/04/housing-bubble-graph-fail.html

I found this read on the correlation between housing bubbles and trade deficits very interesting

http://www.voxeu.org/index.php?q=node/6195

truth, thanks for that! Good to know that chart is off. Makes me wonder where Viglione (the SA author) got his data. As for the higher rates -> crash theory, I believe sledgehammer has been pumping that tune for a while now.

Here's a link to Shiller's up-to-date chart (Excel file). Note the trend for interest rates at the bottom.
http://www.econ.yale.edu/~shiller/data/Fig2-1.xls
Seems to me like Viglione still might have a point.

the reality of the higher interest rates came with higher prices was in the boom years.

if you are looking at the economy being in "neutral", as it is now, and interest rates rising, it will cause pressure on housing prices.

Well I think it's potentially very hazardous future ingredient, depending on what else it's mixed with in the next 2-5 years.

My greatest factors have been and I still maintain, unemployment which directly affects rent.
This chart (#2) shows how out of wack rent to own went starting in '99
(though I cant verify this charts accuracy either :) )
http://www.jparsons.net/housingbubble/

The argument can be made that loan limits for non conforming mortgages don't matter because of prices in manhattan... but you'd be wrong.

http://finance.yahoo.com/real-estate/article/113078/government-mortgage-cap-reduction-wsj

The federal government is readying its first retreat from the mortgage market, with the size of loans eligible for government backing set to decline in October.

As an emergency measure three years ago, Congress raised to as high as $729,750 the maximum loan amount that Fannie Mae, Freddie Mac and federal agencies could guarantee.

That made it easier — and cheaper — for borrowers in pricey housing markets to obtain mortgages, because the government guarantees that investors receive payments on those mortgages even if homeowners default.

Now those limits are set to decline modestly in hundreds of counties across the U.S. as the government attempts to reduce its outsized footprint in the mortgage market and create room for private investors to compete. Government-related entities stand behind more than nine of 10 new mortgages, and taxpayers have sunk $138 billion into Fannie and Freddie, underscoring the eagerness to dial down the government's share.

The new limits will vary widely by location, but will drop to $625,500 in top-tier markets such as New York, Los Angeles and Washington, D.C.

Even though the new limits won't take effect until Oct. 1, some lenders are already warning borrowers that they will stop accepting applications for loans that exceed the new limits much sooner, to ensure the loans are funded before the cutoff date.

Industry groups are making the case on Capitol Hill that reducing current limits in some of the largest markets is "the exact wrong way to go," said Jerry Howard, president of the National Association of Home Builders. But Obama administration officials say the limits should fall as scheduled, and Republican lawmakers have introduced measures to shrink the Federal Housing Administration's reach more aggressively.

Had the lower limits been in place last year, Fannie and Freddie would have backed 50,000 fewer loans, according to the Federal Housing Finance Agency. The bulk of the affected loans — about 60% — are in California, with another 20% in Massachusetts, New York and New Jersey.

Parts of the country with less expensive homes also would be affected; their limits are scheduled to fall as low as $417,000 for Fannie and Freddie loans and as low as $271,050 for FHA loans.

Limits for Fannie and Freddie-eligible mortgages will fall in 250 counties, and FHA limits will drop in about 600 counties. While that is a fraction of the nation's 3,000 counties, economists at the National Association of Home Builders say those densely populated areas account for 27% and 59% of the nation's housing stock, respectively.

The possibility of lower loan limits is causing considerable anxiety in coastal California and other high-end housing markets that will serve as test cases for how the government's withdrawal from housing will affect the market and local economies.

Homeowners whose mortgages are too big to qualify for a government-backed mortgage must seek a so-called jumbo loan, which often carry higher interest rates as well as larger down-payment requirements, sometimes more than 20%.

"Sellers are going to have to reduce their prices if borrowing costs rise," said Scott Sheldon, a loan officer with First Cal Mortgage in Petaluma, Calif.

One of Mr. Sheldon's clients, Ed Barr, has been pre-approved for a $662,000 loan backed by the FHA, the largest mortgage the agency can insure in Sonoma County, Calif. He is racing to close a sale before the limit drops to $520,950.

Mr. Barr, who owns a wine-making machinery company, said he has excellent credit but a recent divorce left him with little cash for such a purchase. "I don't have any other alternative," the 48-year-old said. Without the loan backed by the FHA, which allows for down payments as low as 3.5%, "the sale won't happen."

Scaling back loan limits underscores a broader challenge facing the government: It wants more private players to hold mortgage risk, but it doesn't want to destabilize fragile housing markets.

Craig Van Sant is looking to pay $500,000 for a home with a $20,000 down payment in Rancho Cucamonga, Calif. Once the FHA limit drops to $335,000, he would need to more than double his down payment. The only upside, he said, is that "home values slide even more, allowing us to buy more house, if we can pull together all the cash."

Investors and some academics say the government needs to shrink its footprint if private markets are to re-emerge, and that big loans for pricey homes are a reasonable place to start. "Credit unions, small banks, and hedge funds are all eager to buy these loans," said Brian Brady, a mortgage banker at World Wide Credit Corp. in San Diego.

For now, interest rates for jumbo loans are relatively low, which could cushion the impact of changing loan limits. Rates on 30-year fixed-rate jumbos averaged 5.07% last week, compared with 4.62% on government-backed loans, according to financial publisher HSH Associates. The jumbo rates are near the lowest mark since HSH began its count in 1986, and the spread is the lowest since mortgage markets seized up four years ago.

But rates are only part of the equation. Because jumbos aren't being securitized, banks must keep them on their balance sheets and are generally requiring larger down payments and stringent income qualifications."It'll be a real test of private lenders and their ability to fill the void," said Mark Zandi, chief economist of Moody's Analytics.

A 100K difference? It will mostly affect that percentage who want to borrow 730K and have it representing between 60% and 80% of their purchase. The 900K to 1.2m purchasing crowd who are locked into financing.

Even the article says;
"The bulk of the affected loans — about 60% — are in California, with another 20% in Massachusetts, New York and New Jersey."
So NY is sharing 20% of the effect with NJ and Mass.

I'd say the argument is not that wrong. :)

truthskr, I do ultimately agree it's a potential hazard, but I did find this article (and the data) interesting. I do think it gets exploited as a "surefire" reason prices will take a tumble in the near future. I'm much more inclined to look at unemployment (as you said above) and (as self-evident as it might be) overall desirability of living in this great city. The latter probably won't wane anytime soon. The former I'm still rather worried about.

How do people engage in a serious discussion with bjw, the weak idiot who thought you could get a tax deduction for prepaying his mortgage. The guy has no idea the difference between principal and interest.

Oh, here it comes, some tough talk from bjw, filled with invective like "ninny' and "malarkey".

I ran a quick regregession using Freddie Mac House Price Index vs the Ten year. There was no correlation.
Came in around a 0.2. Not sure what anyone expects here. Last few years interest rates have come down
and home prices came down. In other periods rising rates meant more expensive mortgages which hurt affordability.

The author is spot on. Checked multiple indices that reflect home prices over 20 years. There is no correlation.

hburg, nice. Yep, I was wrong about the mortgage deduction. It happens. So now no one should engage in serious discussion with me ever again. You are indeed a ninny fully of malarkey. At least you've got a sense of humor from time to time.

Once again, a lot of noise but nothing posted to show correlation of interest rates and prices. ab_11218, can you find something that refutes the article in the OP? We don't want your opinion, show us something that actually counts.

Riversider, did you know that stevejhx thinks that Wayne, NJ is correlated with Manhattan on a two year time lag?

Ínonada also correlated NYC and Wayne, NJ

Well Based on the indices I just checked Juiceman NY & NJ state had a 0.796 correlation, so I'll take a guess that Manhattan and Wayne are far less correlated than that.

juicy... how about you show the correlation in times of minimal economic growth and rising interest rates that the prices of housing rise.

the drivel that the author wrote is exactly that.

njoy your weekend

Interesting article and comments on this thread.

Its once again a case of Yes / No.

Through the 70s and 80s you had rising interest rates and rising house prices. It was a high-inflation environment, and a time of an economic boom / significant productivity increases. Also benefited from a one-time change in social customs - breakup of nuclear family, rise of the baby-boomers stoking demand. Hence house price rises in an era of rising interest rates.

Then you see dramatically that prices continued to rise while rates fell and fell through the 90s / 00s. So we're now in a low inflation environment, and a credit-fueled double boom with limited productivity gains. So as rates fall, houses get more and more affordable, so prices rise. (and metrics like avg income / house prices start to spike way more than they did in the 70s/80s - as there are fewer producivity / wage gains).

So prices rose as rates rose, and then rose more as rates fell. All easily understandable in hindsight.

Only question is, what next? A decade of low economic growth? Suggests no underlying drivers for price rises? Rising rates will for sure put downward pressure on prices (based on affordability - its the same people chasing the same houses, so if they can afford less, the houses can't exactly sell for more). Question is, will there be any economic growth to temper this...? In any case, the macro outlook isn't that great for Manhattan house prices. My bet - a decade of sideways movement at best.

I plugged in the time periods you mentioned Jeremy. The FHA data didn't go back before 1981, but there's no strong correlation positive or negative.