Rising interest rates also mean that house prices should drop (or deaccelerate), right? If you figure a buyer has a fixed budget, the more they are paying in interest the less they can pay in principal. Not saying 0.25% will have much effect, but in principle don't they have that relationship?
Eventually. Today, of the many houses sold, there's going to be .25% more people who can't get the loan they want. They're going to move down market, and buy a slightly cheaper house. The more expensive houses might lower their price, or take it off market or whatever.
It's like a distributed system. There's a bunch of complicated moving parts that all react to each other. There aren't that many knobs and levers to pull on. The fed can't tell home sellers to lower their prices, they can just fiddle with interest rates.
It's a mental model to highlight a point. if there were infinite mortgage applicants, and the fed change was the only change in the whole universe, there would be a 1-1 correlation. Lots of other stuff is going on, which pushes back.
No, that's wrong too. I have no idea why you think there would be a relationship like that. The two things you're trying to relate aren't even on the same scale.
> Rising interest rates also mean that house prices should drop (or deaccelerate), right?
Compared to without the policy change (not necessarily compared to before the policy change, though implications of the latter type are frequently treated as if they were of the former type) higher interest rates should mean (with the common assumptions about the dynamics of the rest of the market) both lower prices and fewer sales (buyers can afford less, but there's no reason for sellers to seek less, so the best any property can sell for will be lower and there will be fewer cases where any buyer will be able to offer what a seller would accept.)
I think the big question though is that in super hot markets like SF and the Peninsula, will the demand actually go down enough to slow things? There's a LOT of all cash offers still coming in from overseas. Sure they might have less competition, but I feel like the aggregate demand is so massive and available supply is so restricted (in large part due to Prop 13) that even higher interest rates wouldn't put a big damper on things.
> There's a LOT of all cash offers still coming in from overseas.
Not as many as you think. Saw this the other day:
The San Francisco and San Jose metro areas ranked ninth and sixth from the bottom, with all-cash deals representing only 28 and 24 percent of purchases, respectively. All-cash sales in San Francisco peaked at 36 percent in the first quarter of 2010, Zillow said.
That's really interesting, thanks for sharing your source. I wonder if that accounts for "offers" vs. "buyers." If you have the assets, you can make an all cash offer and come across as much competitive, and then switch things out after your offer is accepted to finance whatever percentage you want without the seller ever knowing. That's a fairly common tactic I've heard about and could definitely skew these numbers depending on what the data represents.
But the broader point of demand is obviously the bigger concern. What are your thoughts on the factors that would impact that? Personally, I see a place to live that has great weather, schools, people, food, culture, jobs, tech, and things to do. It also has proximity to eastern countries which makes it desirable to them. Given the finite land, building restrictions and Prop 13, I really wonder what it would take to have a significant long term hit to prices.
Right, but 25 basis points is such a miniscule increase that it's not really going to do much. It's only a few hundred dollars to buy that amount in discount points.
My feeling is over the next 12-18 months, at least in markets that are already hot (SF, NYC, Boston, etc), you'll actually see house prices rise as the buyers who have been on the side lines are given a kick in the butt to get in the game for fear of losing out on the low interest rates.
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