Why do people think that interest rates matter for BUYING a house?

come on man - there's gotta be something else you could be doing

jamin wrote:It blows my mind that people don't understand this.

What blows my mind is the breath-taking brazenness with which you've just expressed your ignorance.

I would explain why it makes a difference, except I know your pea-brain is already made up and it would be pointless.

Please tell me that this is a clever joke.

You can't be that stupid, can you?

https://www.investopedia.com/terms/i/interest.asp

Fake math!!!

BJB wrote:

come on man - there's gotta be something else you could be doing

Not really, otherwise he wouldn't post his genius thoughts here.

You should stop with the financial threads man. Lot's of weird and highly questionable takes.

Lower interest rates mean you pay less interest (duh). This absolutely means you can afford more house. The monthly payment on two houses of the same price will be lower for the home that is mortgaged at a lower rate. Of course there is some relationship between interest rates and home prices at a macro level but it isn't perfect. Why? because markets aren't perfectly rational, not all people take equivalent (or any) financing on home their home purchase and many other factors.

The primary reason real estate costs far more than it did 30 years ago is interest rates. The problem with paying a lot for a house when interest rates are low is the "value" of the house has the potential to decline dramatically when rates go up. It won't likely be long before interest rate hikes to attempt to rein in inflation eventually bust the housing bubble.

https://www.foxbusiness.com/personal-finance/inflation-mortgage-rates-higher

Housing is ridiculously over valued right now. It's bound to implode in the near future.

Gordon Gekko wrote:

Please tell me that this is a clever joke.

You can't be that stupid, can you?

https://www.investopedia.com/terms/i/interest.asp

If he's saying that if interest rates were 20%, it would cause the housing market to collapse and then you could buy the same house for a lower price but end up paying more interest so it's mostly a wash, I could buy that. But I'm not sure he's saying that....

joed|rrrtty wrote:

The primary reason real estate costs far more than it did 30 years ago is interest rates. The problem with paying a lot for a house when interest rates are low is the "value" of the house has the potential to decline dramatically when rates go up. It won't likely be long before interest rate hikes to attempt to rein in inflation eventually bust the housing bubble.

https://www.foxbusiness.com/personal-finance/inflation-mortgage-rates-higher

Housing is ridiculously over valued right now. It's bound to implode in the near future.

House prices will keep going up because there is not enough housing inventory built anywhere in this country.

Jamin is the example of why finance and economics are best left to the professionals. He was almost on the right path, but veered off dramatically. Anyways, home prices are dramatically impacted by changes in interest rates. In terms of affordability, if home prices decline 50% because rates rise too high, you can get the same home with a much smaller loan and pay a lot less per month. Or get a much bigger home for the same price as before the crash. I guess that’s what Jamin was trying to get at with the Honda and Lexus example. But in that case, you’re paying more to get a higher quality item.

sbeefyk2 wrote:

Jamin is the example of why finance and economics are best left to the professionals. He was almost on the right path, but veered off dramatically. Anyways, home prices are dramatically impacted by changes in interest rates. In terms of affordability, if home prices decline 50% because rates rise too high, you can get the same home with a much smaller loan and pay a lot less per month. Or get a much bigger home for the same price as before the crash. I guess that’s what Jamin was trying to get at with the Honda and Lexus example. But in that case, you’re paying more to get a higher quality item.

Even in 2008 house prices didn't decline by 50%.

In a lot of places they didn't decline much at all.

true and there certainly is a lot of better stuff I could be doing

Are you asking because you are getting run off from squatting on the living room couch

sbeefyk2 wrote:

Anyways, home prices are dramatically impacted by changes in interest rates.

Jamin's initial post was ridiculous, but this statement is equally so. There are plenty of studies that show interest rates do not dramatically affect home prices (especially when you consider the many times during which interest rate creep and inflation are occurring at the same time).

My house has gone up in value about 30% since I bought it four years ago. This isn't just a Zillow estimate-- we have neighbors who have identical floor plans who have sold for 30% over what we bought our house for. There is absolutely no way the prices would have increased as quickly without the decline of already super-low interest rates. Most people just plug their rate into a mortgage calculator to see what payment they can afford, and most mortgage brokers do the same with your income to see what you qualify for. The same payment at 3.125% as opposed to 4.25% is going to get you a larger purchase price. I don't pull those numbers out of the air, either-- we bought our house with a 4.25% rate and have already refinanced to 3.125% (I think rates are even lower now).

When rates go up, some of that is going to cool off. I don't think prices will go down here, but they will likely stop increasing at such astronomical rates. Still, some people are going to get a little squeezed because higher rates mean they will qualify for a lower mortgage while prices are still inflated from the bubble (and from stubborn homeowners who think they should still get what their neighbors go last summer). I still think it's necessary-- rates have been so low for long that things are pretty out of kilter.

None of this really has anything to do with the OP's post, which makes no sense.

jamin wrote:

I don't mean on an individual basis at a point in time, e.g. Person A today can get a loan at 2% and Person B at 4%. I mean the interest rate environment as a whole.

Mathematically, it doesn't make any difference for the BUYER if interest rates are around 0% or 20%. You get the same house either way. Low interest rates don't mean you can afford more house.

It's the same thing if you're buying a car on credit. Affording a Honda with 10%-down-17%-interest doesn't mean you can afford a Lexus with zero-down-zero-interest. You can afford the same car either way. The only beneficiary of low interest rates is Honda/Lexus itself because it can sell cars at higher prices.

It blows my mind that people don't understand this.

+1. People can be dumb

Low rates do mean you can afford more house.

Lower rates means your monthly payment on a mortgage will be less.

The monthly mortgage payment ultimately determines what you can afford, not the purchase price.

jamin wrote:

I don't mean on an individual basis at a point in time, e.g. Person A today can get a loan at 2% and Person B at 4%. I mean the interest rate environment as a whole.

Mathematically, it doesn't make any difference for the BUYER if interest rates are around 0% or 20%. You get the same house either way. Low interest rates don't mean you can afford more house.

It's the same thing if you're buying a car on credit. Affording a Honda with 10%-down-17%-interest doesn't mean you can afford a Lexus with zero-down-zero-interest. You can afford the same car either way. The only beneficiary of low interest rates is Honda/Lexus itself because it can sell cars at higher prices.

It blows my mind that people don't understand this.

Truly breathtaking stupidity.

When you make a mortgage payment, most of that payment is interest, not principal. So a lower interest rate means you are being charged less for the privilege of getting the loan—less money out of your pocket month to month and less spent over the course of the mortgage—a lot less. Or if you sell before paying off the mortgage completely (very common), having a lower interest rate will mean (for less per month, likely) you have paid off more of the premium—therefore you have more profit left after sale.

joed|rrrtty wrote:

The primary reason real estate costs far more

You're confusing price tag (sell value) with cost.

Cost is a matter of supply and demand. Increased demand relative to supply can increase cost, and since price tag is a percentage of cost, thus increase price tag.

Let me give an analogy. Let's say interest rates were NEGATIVE 10%, meaning you get paid to live in a house you buy. That doesn't mean Beverly Hills is suddenly everyone can move into their own Beverly Hills mansion. The league of mansion buyers is the exact same.