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Comment by jimmyswimmy | Hacker News Reader

This seemed highly unpleasant but ignores the effect of falling interest rates over much of the study period. I put together a plot using FRED data to show the cost of monthly housing (assuming a US-style 30 year mortgage) as well as its annual cost as a percent of median US household income.

https://imgur.com/a/0F20SGF

It could be better - I'm quite envious of those who owned a home in the 1970's - but clearly there has been some secular change in US expectations of housing costs as a percent of income. There is an upward trend but nowhere near as dramatic as this post tries to show. In 1980 housing represented 21% of income, in 2016 it was 24%.

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I think that is correct. While most people buy a house -- they budget to a payment. The last time we moved our realtor even tried to engage us in this direction. It is very similar to the way car dealers explicitly work -- "What do you want to spend a month?"

If interest rates rise dramatically, average home price will necessarily fall.

This recent Indicator podcast discussed this. Surprisingly, historical data does not support the notion that rising interest rates leads to lower housing prices. But maybe this time will be different. https://www.npr.org/sections/money/2018/05/15/611386612/risi... Here is the relevant paper by Laurie Goodman. https://www.urban.org/sites/default/files/publication/92541/...

If interest rates rise and then fall again over a relatively short term (several years or longer in the case of real estate) then housing prices might not fall much because owners will pull property off the market and wait for it to improve. The reduced supply (possibly greatly reduced) will tend to drive prices higher even as interest rates are driving them lower.

I would argue that low interest rates in part caused this skyrocketing home value effect for the simple fact that low interest rates have convinced people over the last 30 or so years that borrowing is more profitable than saving (I'm grouping all interest rate regimes after 1981 into the low interest rate category). Would be nice if we could put to rest the notion of home ownership as a good forced savings plan, investment plan, etc.

So... higher availability of credit / higher financialization -> higher prices?

That may be it. But interest rates are a big part of this.

Most people have to take a mortgage to buy a house. This means that the demand part of the "supply and demand" curve is set, not by the price of the house, but by the monthly payment for it. The interest rate affects the relationship between the two.

For example, I bought a house when interest rates were 9%. Two years later, interest rates dropped to 7%. In the same two years, the price of my house went up by 50%. If I bought the same house after those two years, my monthly payments would have been exactly the same.

But it's not just monthly payments. Down payment is the other thing that affects the demand curve. That's where "higher financialization" comes in - at least, if I understand the term correctly.

Well, I would think that low interest rates go together with financialization... By financialization I mean the stock of credit per-capita[0].

If you look at the ratio of house prices to years of work, these are things that have happened in that time: a) more mortgages, with longer terms, b) lower interest rates, c) higher financialization. I think all of these go together.

People wouldn't borrow so much to buy a house if they couldn't keep the payments low, for which they need longer-term mortgages and lower interest rates. Conversely, home prices couldn't rise as much if people couldn't afford them. Lower interest rates and longer mortgage terms stoke demand, but also, the fact that people can afford to pay more means that suppliers will demand more too. And since suppliers have debt too, I suspect that they could only have stayed profitable by increasing prices -- that merely increasing supply to match the higher demand without increasing prices was not an option for the industry as a whole.

You're right, I'm sure, that lower downpayment requirements are part of the story, so it's not just the monthly payment.

[0] https://en.wikipedia.org/wiki/Financialization

> Financialization is a term sometimes used to describe the development of financial capitalism during the period from 1980 until 2010, in which debt-to-equity ratios increased and financial services accounted for an increasing share of national income relative to other sectors.

> (assuming a US-style 30 year mortgage)

this is a highly biased assumption (historically speaking) and we should be hard reversing the trend of longer and greater indebtedness not blindly normalizing it.

The U.S. economy's financialization has mostly only gone up since the 20s, with occasional crises like the Great Depression and Great Recession. How would one reverse a century-long process like this?

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