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Comment by xnx | Hacker News Reader

Housing costs are strongly affected by the availability of cheap money. Housing prices are kept in check when mortgages are more expensive.

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>Housing prices are kept in check when mortgages are more expensive.

Housing prices are kept in check when it is expensive to buy housing? This isn't necessarily false, but it is an obvious contradiction that highlights how complicated these issues end up being in reality.

When buying power goes down, prices have to go down to compensate.

No prices do not "have to go down". You are assuming supply is constant but supply also fluctuates depending on interest rates and home prices.

It’s not that complicated really. House prices tend towards the level where a mortgage payment roughly equals a rent payment (since they’re substitutable). So when mortgage rates go down house prices go up commensurately.

>House prices tend towards the level where a mortgage payment roughly equals a rent payment (since they’re substitutable).

No these two are not direct financial substitutions. You are ignoring a down payment (or mortgage insurance), property taxes, maintenance, and the general risk that comes with home ownership. Monthly mortgage payments should be a decent amount cheaper then rent payments on an equivalent property.

Renters are paying all the same things you are, and are usually paying through the rent much higher taxes and mortgage interest. The only difference is they don't have variability in expenses (AC goes out) -- but neither does a large landlord.

Definitely worth properly modelling out both buy and rent scenarios including all related costs, the substantial tax benefits of the mortgage interest deduction, remembering you are paying down principal in the mortgage payment, and the opportunity cost of the down payment. But when I've done this the cutover point is usually fairly close to where mortgage payment = rent.

The other thing that's notable when you model the scenarios is how much of a difference it makes how long you stay in a house given the absurdly high transaction costs of selling in a house in the US. 5% realtor fees! $50k on an SF condo, $75-100k on an SF house.

Maybe not the first few years. Rent payments inflate and mortgage payments don't.

When mortgages are expensive, down payments buy more. Except in the short-term it appears that falling interest rates simply raises the nominal price of housing until it reaches the buyers ability to pay the monthly price + down payment.

Increasing interest rates erodes buyers ability to borrow, which will require prices to fall.

True, but higher housing prices also impede people who save their money instead of taking on 30 year debt. I would definitely prefer higher interest rates and cheaper housing for that reason.

agreed, at the margin there are buyers with a virtually unlimited ability to borrow. If interest rates stay low for long enough I'd expect the majority of housing to be owned by hedge funds and investment banks.

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