Minyan Mailbag - Housing and Interest Rates
Note: Our goal in Minyanville is to remove intimidation from the financial markets and encourage an interactive dialogue among the Minyanship. We share this next discussion with that very intent.
Recently you wrote about the distinct possibility of the Fed having to lower rates. Doesn't this bring up the possiblity that housing may rise to even more bubble-like proportions. Many folks, including me, are not able to buy homes because of the rapid rise of house prices (since we don't want to get in over our heads in debt). I have been hoping that once the rates rise and housing cools down, one will be able to own a place to stay at more reasonable prices. It would be really helpfull if one of the professors can comment on the relationship between the possibility of lower rates and housing in the future.
Unfortunately, the answer is yes: lower rates will most likely perpetuate high housing prices, although it may not cause an acceleration of prices (this depends more and more on the financial condition of consumers whose incomes are not rising despite higher economic activity). Some say that housing prices are not that high, but if you look at the spread between rental costs and housing prices you cannot draw that conclusion.
This dramatic spread also tells us another alarming thing. Since rents have been stagnant relative to housing prices (the spread is at an all-time high), we can conclude that overall demand for housing is not really going up. What is happening is that normal demand is being shifted away from renting housing to buying it. This is a function, again, of the dramatic loosening of credit and the consequential reaction of consumers moving up the risk curve.
Most people do not look at the actual cost of the house, but rather the
cost of financing that house, their monthly payments. These service costs can rise dramatically for people not paying attention if rates rise and they have adjustable mortgages.
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