Interest rate cycle

[silverfish]

http://finance.yahoo.com/blogs/talking-n...58843.html

I was looking at that chart of the supposed 60 year interest rate cycle.

It looks more complicated than that, but it does look as though interest rates are about to rise sometime around now.

Does anyone know a chart that compares interest rates to house prices?  Because I seem to remember reading that house prices started to go up a lot just after the second world war.  From that it did seem as though house prices and interest rates did not necessarily move together?  Another stray bit of information is that the writer Mervyn Peake took out a mortgage in the 1950's, which is thought to be one of the things that slowly destroyed him, and he died in 1968, his book Gormenghast is somebody said the record of a man disintegrating. So it looks like mortgages might have been difficult to keep up with in the 1950's, even though house prices were rising for some other reason?

Seems house prices in the UK started rising from 1955, having fallen in the years before that http://www.telegraph.co.uk/finance/prope...-days.html So there were rising house prices at the same time as rising interest rates, so they aren't the same thing?

[brunt]

The longest graph that I could find was from this source: https://infofinancejournal.blogspot.ca/2...chive.html. The graph goes back to 1950 and looks like this:



There is less correlation than you would think given the relatively flat line from 1950 through 1997 of house prices.

[silverfish]

The longest graph that I could find was from this source: https://infofinancejournal.blogspot.ca/2...chive.html. The graph goes back to 1950 and looks like this:



There is less correlation than you would think given the relatively flat line from 1950 through 1997 of house prices.

Thanks.  Interesting.  I think house prices might have been different in the UK than America, I am sure they went up from about 1955 strikingly, and even more so between about 1980 and 1990, before dipping until about 1995 when they really took off.

I read that house prices rose after 1955 in the UK due to general prosperity, people just having more money and being able to buy houses in spite of rising interest rates. Also there was massive government effort to rebuild a decade after the war ended, with government grants.

[diverdown]

Thanks.  Interesting.  I think house prices might have been different in the UK than America, I am sure they went up from about 1955 strikingly, and even more so between about 1980 and 1990, before dipping until about 1995 when they really took off.

I read that house prices rose after 1955 in the UK due to general prosperity, people just having more money and being able to buy houses in spite of rising interest rates.  Also there was massive government effort to rebuild a decade after the war ended, with government grants.

You've hit the nail right squarely on the head, Silverfish.

While the general level of interest rates is a large contributing factor to the general level
or rate of change in house prices, it is not the major factor.

That factor is the amount or level of real income necessary to service that mortgage debt.

A rising  level of real (inflation-adjusted) income is the primary cause of a rising level of house prices
(although not the only one).

Since most apologists and housing pundits are, just like the Federal Reserve, completely and uncannily unable
to see any kind of bubble until after it pops, we are continuously inundated by claims and treatises that
supposedly show, despite common sense, that housing & housing prices are not in a bubble.

However.

The chart below clearly and unambiguously shows a direct correlation between
housing prices and real income.

Anytime that housing prices (black line) are below the line of real wages (red line), then housing is a bargain.

Conversely, any time that the black line is above the red line, housing is overpriced and one of two things
(or combination thereof) is definitely going to happen:

1)     Wages are going to rise substantially and rapidly in order to validate the high housing price or

2)     Housing prices are going to fall precipitously to match the available income needed to service it.


 



As you can see, the average house price has not exceeded (or not exceeded by much) the peaks
in price from around 2006 - 2007, around eight or nine years ago.

This has led, of course, to the proclamation (by the NAR & others) that housing prices are
not in bubblelicious territory.

But if you notice the gap between prices and the income level needed to service it you can
clearly see that the excess is actually greater now than it was during the peak real-estate
mania.

Not a good sign.

With changes in real income essentially stagnant, one of the few remaining factors still propping
up current housing prices is the extraordinarily low level of interest rates.

And, as is their wont, the NAR (National Association  of Realtors) is starting to trot out their
usual shibboleths, like "Ya know, they aren't making any more land!"  and "Better buy now,
before you're priced out of the market entirely!".

And when mortgage interest rates start to rise..........?

For Real Estate, now is a good time to sell.

[Finster]

http://finance.yahoo.com/blogs/talking-n...58843.html

I was looking at that chart of the supposed 60 year interest rate cycle.

It looks more complicated than that, but it does look as though interest rates are about to rise sometime around now.

Does anyone know a chart that compares interest rates to house prices?  Because I seem to remember reading that house prices started to go up a lot just after the second world war.  From that it did seem as though house prices and interest rates did not necessarily move together?  Another stray bit of information is that the writer Mervyn Peake took out a mortgage in the 1950's, which is thought to be one of the things that slowly destroyed him, and he died in 1968, his book Gormenghast is somebody said the record of a man disintegrating.  So it looks like mortgages might have been difficult to keep up with in the 1950's, even though house prices were rising for some other reason?

Seems house prices in the UK started rising from 1955, having fallen in the years before that http://www.telegraph.co.uk/finance/prope...-days.html  So there were rising house prices at the same time as rising interest rates, so they aren't the same thing?

Here's my chart of the US Treasury ten year going back to Reconstruction.  Note the yield is plotted negative so as to connote price.  There is a clear roughly six decade cycle visible, although it has become much more pronounced and volatile as the Fed has stepped up its stabilizing efforts.

[diverdown]

Rising house prices can only continue with rising real incomes.

Since the rate of change in real incomes has essentially been static, the only thing holding house
prices at their elevated level has been the low rate of interest on mortgages.

And a change in the interest rates (higher) on mortgages will have a deleterious effect on house prices.

As you can see in the chart below, interest rates bottomed this past summer, and mortgage applications
have plummeted by 30%  since:






And this decline in demand  as reflected in the decline in mortgage applications will have a corresponding
effect  --  from Econ 101, a decline in price.

Looks like the next leg down in the ongoing house price collapse is beginning.

But since Real Estate is so illiquid, this is going to be a long process..............

[cbeatty]

Rising house prices can only continue with rising real incomes.

Since the rate of change in real incomes has essentially been static, the only thing holding house
prices at their elevated level has been the low rate of interest on mortgages.

And a change in the interest rates (higher) on mortgages will have a deleterious effect on house prices.

As you can see in the chart below, interest rates bottomed this past summer, and mortgage applications
have plummeted by 30%  since:






And this decline in demand  as reflected in the decline in mortgage applications will have a corresponding
effect  --  from Econ 101, a decline in price.

Looks like the next leg down in the ongoing house price collapse is beginning.

But since Real Estate is so illiquid, this is going to be a long process..............

Why can't house prices rise based on increased nominal income. In fact isn't that part of why they have risen ....... increased nominal income?

[Finster]

Rising house prices can only continue with rising real incomes.

Since the rate of change in real incomes has essentially been static, the only thing holding house
prices at their elevated level has been the low rate of interest on mortgages.

And a change in the interest rates (higher) on mortgages will have a deleterious effect on house prices.

As you can see in the chart below, interest rates bottomed this past summer, and mortgage applications
have plummeted by 30%  since:






And this decline in demand  as reflected in the decline in mortgage applications will have a corresponding
effect  --  from Econ 101, a decline in price.

Looks like the next leg down in the ongoing house price collapse is beginning.

But since Real Estate is so illiquid, this is going to be a long process..............

Why can't house prices rise based on increased nominal income. In fact isn't that part of why they have risen ....... increased nominal income?

That would be my take, CB.  If we were talking about real house prices, we might expect them to depend more closely on real income, but nominal house prices would better track nominal income.

There are several variables involved, but the big macro ones would be income and interest rates.  Interest rates express a relationship between a cash flow and a lump sum, and mortgages convert a house price into a monthly cash cost.  So the amount of house that a given income level will support varies inversely with interest rates.  So the relationship between house prices and these two variables would roughly be HP = k*Inc/Int ... i.e. house prices HP would vary in direct proportion to incomes Inc and inverse proportion to interest rates Int.

Of course, because the entire monthly payment isn't interest (although most of it typically is) and not all houses are bought on monthly payments alone, the interest rate dependency is slightly less than that (in this formula you could raise Int to some power slightly less than one), but as a general rule of thumb this would give you a good expectation of how to expect these macro variables to influence house prices.

[diverdown]

Looking at nominal income and nominal prices yields the exact same conclusion.

First up:  New Home Prices

Note the P/I (Price to Income) ratio:





Used (resale) Homes:





Current prices (whether measured as nominal or real) are solely being sustained by extraordinarily low mortgage rates.

When rates rise, those prices are going to do a swan dive, a replay of 2007 - 2010.

[cbeatty]

Thanks Gentlemen.