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Comment by meterplech | Hacker News Reader

100% true.

And a good reminder of how much exposure housing prices have to interest rates. To frame the same math another way:

If you bought a house for, say, $580k with a $500k mortgage... You paid $80k down payment + $20k closing costs and your monthly would be ~$2,073/month.

If interest rates go up to 6%, and the person buying your house also wants to pay the same ~2,073/month, they would only be able to afford a $344,649 mortgage. Assume the same $80k down payment and $20k closing costs... and they should be willing to pay $444,649 for your house ($135,351 less than you paid!).

Obviously with inflation the person may be willing to spend more than you spent! But there's a lot of risk for homeowners who need/want to sell if/when interest rates go up. That's why the 30 year fixed is such a fantastic bet if you are willing + able to hold and lock that fixed price... but housing is a pretty lousy investment if you need to sell.

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This logic doesn't hold in all housing markets.

In California, people generally buy the absolute most house they can possibly afford. Houses are extremely expensive and people don't want to live in shacks, so they stretch their budget as far as they can. Home prices in these markets are extremely sensitive to changes in interest rates, as you've described.

However in other markets, interest rates can wiggle up and down without having as dramatic an effect on prices, because livable homes aren't as expensive and people have more slack in their budgets.

In markets with lots of cash buyers, home prices may also be somewhat isolated from interest rate swings.

Sincere question - can you point me to such markets where interest rates can wiggle up and down without having as dramatic an effect on prices?

I can't, but as prices go lower more people can just save money rather than borrow to purchase. So an exponential curve, the higher the rate the smaller the effect on asset price.

I worked in the mortgage industry for a couple years, and it was common knowledge there that California home prices were the most tightly coupled with interest rate changes.

I'm not sure which markets are at the opposite end of the spectrum, but you could probably get a good idea by looking at the ratios between median household income vs. median mortgage payment in any given market. Households (currently) spending a smaller fraction of their paycheck to pay their mortgage should be able to better absorb some price increases.

According to this visualisation on Zillow[1], California is indeed the worst. The median household in San Jose would have to allocate 53% of their income to pay a median mortgage, compared to the national average of 17.5%:

[1] https://www.zillow.com/research/q2-2018-affordability-21286/

In lots of smaller towns, lots of decent houses are priced at 3x an okay annual salary.

Interest rates have less impact on that price than houses that are priced at 10x annual salaries.

I've wondered if we are in a regime today where interest rates simply can't go up. I can't imagine a scenario where they can go up more than a point or two without blood in the streets... possibly literally.

Even minor changes to inflation can deflate asset bubbles without blood in the streets. 2% inflation might make your existing how less valuable for a few years but it’s also rapidly making your mortgage payments more affordable. The real issue is this sets up golden handcuffs where buying an equally valuable house elsewhere would be a huge financial hit for much longer.

Interest rates must go down when inflation is low. If you insist on high interest rates you will also need higher inflation to justify them. Think about it this way. Interest raises the cost of borrowing, it makes reproducible assets more expensive. Over the long term you see cost push inflation. If interest rates can't be passed onto consumers then the borrower will default. That's not a good thing.

It's going to be quite interesting how the bay area fairs if more companies leave over time. I've refused to buy a house thus far and have been looking into more economical (and practical ways) to live on the move given that I've had to move so much in this industry.

I went down a rabbit hole and analyzed Fannie Mae data and found buying a home is increasingly affordable when you consider low interest rates and the median income.

> In October 2019, the median mortgage payment would cost the typical American 18.21% of their income. Apart from a few months in the early 1970s and 2011–2013 period, homes have never been more affordable. [0]

>That's why the 30 year fixed is such a fantastic bet if you are willing + able to hold and lock that fixed price... but housing is a pretty lousy investment if you need to sell.

That's not necessarily true because if rates go up you can bet that property values would go down as home ownership would become less affordable. And if you bought a home for $300k and rates go up and now your home is only worth $250k, that's not a great value, because had you not bought, you would be able to buy the same home for less, although that might be offset with the higher payment

[0] https://mleverything.substack.com/p/buying-a-home-in-the-us-...

I’ll take a cheaper house with higher interest rates (up to a point of course) all things being equal. More equity and interest is deductible.

I'm not sure about the more equity part. You mean you would put down a higher down payment?

Because once the house is paid off there would be more equity for the more expensive house.

> More equity and interest is deductible.

It is much harder to deduct interest these days with the higher standard deduction. Interest deductions on a cheaper house might only a few years unless you have something else going on with your custom deductions.

The equity aspect is also questionable. Cheaper markets are cheap for a reason, and while they might hit a growth spurt, it is far from guaranteed. A booming market with high prices might also continue to...boom even more. Anyways, the market is actually efficient, you can't find a loophole that everyone else is missing.

Exactly - low interest rates mean higher house prices. The UK gov paused stamp duty for six months, so guess what - there was more money to spend on the bid price.

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