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Comment by quickthrowman | Hacker News Reader

Rate drops will make affordability worse, you do understand that less interest just means more principal, right?

If a mortgage payment is $1800 of interest and $700 of principal at 7%, a buyer is in the same position if rates go down to 3% and the payment is $1400 in interest and $1100 of principal (numbers are made up, I don’t have time to calculate the exact values). In the 2nd case, the home price would be higher and the lower rate would mean reduced financing costs, with the same TCO in the end.

Bonds work the same way, as the yield goes up above what the bond was issued at, the face value of the bond decreases, only the housing market has limited supply so prices didn’t go down when rates went up.

If yields go down, the face value of the bond goes up, just like with houses.

The only thing that will lower housing values is more supply.

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For a fixed loan term and fixed price, less interest means lower payments. (But of course if you assume that prices will do whatever you want them to, then you can prove anything you want.)

Bonds do not work like houses. Typically bonds pay out a fixed coupon rate and then 100 at the end of the term (fingers crossed).

Fixed loan term and fixed principal, yes.

Grandparent is alleging that in a lower-rate environment sellers will raise prices until buyers' monthly payments are about the same as they are in this high-rate environment.

Agreed, sure, alleging.

> alleging that in a lower-rate environment sellers will raise prices

Didn't we see exactly this scenario play out in 2001-2005 and again during Covid?

> Heading into 2020, affordability was increasing—even in the face of rising home prices—as buyers benefitted from historically low interest rates and steady income growth.

> The national HOAM index fell from 101.94 in February 2021 to 98.22 in March 2021, indicating homes were no longer affordable for the median-income household.

Rates dropped which caused a demand-side surge (because more people could afford the mortgage) which quickly turned into a market dynamic that caused home prices to increase beyond median affordability.

https://www.atlantafed.org/economy-matters/community-and-eco...

I'm afraid this discussion is in danger of sinking from finance into economics. Sure, what you describe is one thing that happens. Interest rates affect demand. Demand affects price. If you pick your data, you can find times when that mechanism appears to dominate and the model fits perfectly for a while. But in general it's simply not the case that interest rates, alone, determine house prices.

I think the point was that dropping interest rates alone will not make anything more affordable. It will actually have the opposite effect: increase prices without any material change to the underlying property value. Fueled purely by the demand of newly-qualified buyers.

Yeah, that is the point. But it isn't necessarily correct. It's an idea. Sometimes it's true.

Less interest means that buyers can ask for a higher price for their home and the buyer will have the same mortgage payment as they would with a lower priced home and a higher mortgage rate.

The buyer is paying the same TCO in the end so they’ll accept the higher ask from the sellers due to limited supply and the TCO being equal. The Fed is about to start cutting rates so you can watch this happen in real time over the next few years.

Bonds work that way if you hold them to maturity, but the face value is continuously being repriced as rates fluctuate. You don’t have to sell, but that’s how bond pricing works.

Agreed, anybody can ask for more money.

Traditionally the face value of bonds is fixed. The sale price is continuously repriced as rates fluctuate.

Much love to whoever downvoted this absolutely drab and incontrovertible comment. Stand up for what HN means to you.

Home prices will absolutely go up when interest rates go down. You are being downvoted because you are wrong. I am willing to place a sizable bet on that if you believe you’re correct and think I am incorrect.

You don't seem to be reading my comment.

Of course lower interest rates tend to push prices up, everything else being equal. The claim was that prices will rise so fast that buyers will be worse off with lower interest rates. That's not necessarily true. It might be true. Sometimes it's true.

I'm honestly a little tired of answering objections from infallible people who haven't quite read the thread or don't quite know what they're talking about.

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