Sunday, January 21, 2018

House values and the interest rate

The latest data from FRED shows the median sale price of an existing house is $250,000

The value of houses is very sensitive to interest rates.

Shoppers are typically working within a budget.  They can only afford what they can afford.  Eventually, sellers must price to the market.  This mechanism is completely independent of the effect rising interest rates has on hours worked.  In practice, the budgets most buyers are working with also shrink when interest rates rise.

If the market starts at 4.0% a 1.0% rise in the interest rate will reduce the selling price by 10% and start to push new home-owners underwater.  That assumes 10% down and 30 year fixed mortgages.

Rising interest rates also puncture the wealth-effect of rising equity in homes.  Few things make you feel poorer than seeing a $25,000 loss on paper.

1 comment:

  1. Thank you for sharing such great information.
    It is informative, can you help me in finding out more detail on
    house loan interest rates.

    ReplyDelete