Interest rates and home prices are independent but are correlated through demand and supply of money, and conditions of economy. When economy is booming, folks dare to buy houses, demand of money increases hence interest rate increase. For SFBA, economy booming so house prices increase… no surprise here. The galloping house prices are due to: very low mortgage rate (due to Fed actions), low inventory (prop 13 and bank action) and foreign monies.
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Btw, the increase in Fed rates didnt drive up mortgage rates…in fact the 10year bond rate has gone down.
10 year is down 100 basis points year on year
Less Chances as this is election year. Since last rate increase, all indexes are lower or flat.
I am getting atleast 10-15 price drop alerts in the sanjose area ( not a particular zip but whole sanjose) from redfin. Are they pricing too high? No buyers? whats happening? any clue?
Wrong statement.If you clearly understand what is FED FUND rate, you would not say this.
Even though MBS rates are fluctuating like stocks, the base line is increased when FED increases rate. You may not see the difference with 0.25% unless as the equivalent costs are hidden or lender is taking less profit equivalent of 0.25%. After the last hike, mortgage rates are increased 0.25% level, for sure.
For that you must understand MBS, secondary market for real estate, service providers and the relationship with FED rate.
IIRC, you have locked the ARM at 2.25% or 2.75% which you won’t get it now.
Marcus,
OMG, you are misleading like a blind man identifying an elephant !!! It is completely wrong logic.
I do not want to argue or waste my time on such trial issues as everyone knew what is sub-prime and its impact.
Good luck to you all,
How do you explain the 70’s?
1970: 30-year fixed rate was 7.25% and median home price was $23k
1981: 30-year fixed rate was 17.5% and median home price was $70k
Elt is right that 30-year mortgage rates follow the 10-year bond. That’s because fannie/freddie buy all the mortgages, then sell the bonds with a US government guarantee.
Your statement “Rates were going up 2004 to September, 2007. Home prices were going up that whole time” is a fact, but wrong co-relation.
Rates are not exactly following 10 year, but bond market for the period (10 year fixed may follow 10 year bond etc with a mark up).
Mortgage follows Bond market is well known in real estate financing as FNM package it, sells in secondary market.
Behind these hidden is FED FUND rate. If FED Fund rate increases/decreases, everything has to increase/decreases.
If it behaves opposite side, either some one is making loss (Fund rate hiked, Mortgage Decreased) or some one is making huge gain (Fund rate lowered, Mortgage is Increased).
In simple terms, FED FUND rate is bank-to-bank borrow rate
Interest rates are not as important as sentiment. …Buyers are optimistic, that is all that matters. And most buyers use 30 fixed that follow the 10 year bond, rates are about as low as ever.
Americans Are Feeling Wealthier, More Upbeat
DAILY REAL ESaTATE NEWS | WEDNESDAY, JUNE 08, 2016
Fannie Mae’s Home Purchase Sentiment Index zoomed to an all-time high in May as consumers get more upbeat about their paychecks and home selling. In May, the index reached a reading of 85.3, which follows an 18-month low reached in March.
It’s Been Building
Fannie: ‘Things Are Looking Up for Housing’
Consumers Show Shift in Home Ownership
Americans’ Attitude Improves on Housing
Three of six components the index measures registered increases last month, led by a 7 percentage point increase in the number of consumers reporting significantly higher income than a year ago. Also, the number of consumers who expect home prices to increase over the next 12 months rose 5 percentage points. Consumers were also upbeat that mortgage rates would decrease over the next year as well.
That said, the index indicator on whether it’s a “good time to buy” dropped 1 percentage point to an all-time survey low in May.
“Continued home price appreciation has been squeezing housing affordability, driving a two-year downward trend in the share of consumers who think it’s a good time to buy a home,” says Doug Duncan, senior vice president and chief economist at Fannie Mae. “The current low mortgage rate environment has helped ease this pressure, and fewer than half of consumers expect rates to go up in the next year. While the May increase in income growth perceptions could provide further support to prospective home buyers as the spring/summer homebuying season gains momentum, the effect may be muted by May’s discouraging jobs report.”
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I see you refused to address the 70’s. Can you find one period in US history where home prices went down while rates were increasing?
You don’t get what I’m saying. Rates only increase when there is too much inflation. You only get too much inflation if wages are increasing, because wage increases are what cause price increases. If wages are increasing, then people can afford higher payments. You think it’s a 2 variable equation of interest rate and home price. You’re missing wages and inflation.
You’re also over simplifying mortgage rates. It all depends on how well the bonds sell on the market. That’s impacted by investor sentiment and future expectations of inflation. Future expectations for the value of a dollar matter too. If the dollar is going to get stronger, then foreign investors will accept a lower interest rate on USD denominated debt. Look at the USD vs EUR since the fed rate increase. The dollar has generally appreciated. The 30-year fixed was 3.9% in Dec, 2015. Today, it’s 3.6%. How is that possible when the fed increased the rate 0.25% in December and is openly discussing raising it again this year?
You’re using far too simple of equations, and it’s causing incorrect conclusions.
elt1 statement is at least better “Buyers are optimistic, that is all that matters”. This is half way good, but not entirely right.
This is simple demand vs supply and money availability. When stocks or economy are doing great, people are optimistic and buying home even though rates are going up.
Rate increase apply pressure on economy and slow down growth. This is the exact reason, FED is not increasing the rates. Ever since Dec 2015 rates are increased, economy is flat, not growing. Six months many homes are reduced price more than one time. Normally, Feb-Aug is a great time for real estate, but this year it is flat or reduced.
Your co-relation is wrong on rates vs home price prices without understanding basics.
As I said already it is misleading the viewers with wrong concept. Any way, I am not going to argue, let me leave it here.
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Thanks everyone! I think it’s clear that I need to take an economics course! This is all complex and interrelated 
That’s what I thought. You can’t or won’t address any of the questions and go in circles.
Agreed it is super complex and interrelated!
I am not an economist but have taken a few classes and have recently been reading up on the subject. My take on it (I’m sure an economist would say this is WAY oversimplified) is that it is more about the impact of the Federal Fund Rate on the overall economy than on specifically mortgage rates.
When rates are low businesses borrow money cheaply, VCs are flush with cash, & the economy booms. Folks around here tend to get stock options & can cash them out for big bucks to buy a home.
Rates go up, cash isn’t as cheap and at some point businesses tighten their budgets, layoff employees, VCs require an actually plan to profitability to get funding. IPO market & company acquisitions stall…so no more buying homes with stock option cash ==> prices fall a bit until it starts all over.
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My understanding is that this is happening right now–businesses are tightening their belts.
Rates go up, cash isn’t as cheap and at some point businesses tighten their budgets, layoff employees, VCs require an actually plan to profitability to get funding. IPO market & company acquisitions stall…so no more buying homes with stock option cash ==> prices fall a bit until it starts all over.
[quote=“Terri, post:35, topic:273”]
My understanding is that this is happening right now–businesses are tightening their belts.[/quote]
Employment from big boys (Apple, Facebook, Google) dwarf startups. Those skilled in AI/Machine Learning are making very good money and can easily outbid other tech guys in home purchases. Every sector wants these guys.
Money is still loose. Rates are still near historic lows. Some European countries have negative rates (another reason US treasury yields have gone down since our rate increase). The bigger issue is lack of revenue growth. We’ve had 3/4 quarters of YoY revenue decline for the S&P 500. Q2’15 was -7.31%, Q3 -2.55%, Q4 +2.34% (rate hike in that quarter), Q1 -1.76%. You can see the declines are getting better and Q2 this year will have an easy compare to last year.
That’s putting huge pressure on companies to cut costs to show profit growth. You have to show profit growth, because profit declines are the kiss of death for a stock. Also, companies have debt that’s maturing. They need to issue new debt to payoff the old. Who wants to buy debt in a company with declining revenue and profit? That’s much riskier and will have higher yields. Now you’re increasing interest expense when profits are already declining. The coverage ratio goes crap. That’ll tank a stock price, since stock investors are last in line in liquidation.
Energy is screwing up everything right now. The revenue and earnings drops are so bad, they make the S&P 500 overall numbers look bad. Plus, people are nervous about it spilling into financials. The defaults on energy debt are raising at an alarming rate. Energy is cheaper, but consumers are savings 50% of that delta. It’s taking money out of the economy.
Then there’s the China issue. Next year is when a massive amount of their debt matures. They will need to issue new bonds to pay it off. All that while they keep adding more debt, and their economy is growing slower and slower.
The scary part is we’ve added almost $1T/yr to US debt since 2003. We still can’t get the economy off the ground. Most developed countries are in the same boat. We’ve significantly increased debt, and what do we have to show for it?
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Economics is known as the dismal science. …line up all the Economists and they wouldn’t agree on anything. Again macro will make you crazy. Micro will make you money…Keep your debt low. Live below your means. Invest in your own home first…Then invest in what you know. …Intensify to make money. Diversify to take less risk if it makes you sleep better…
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[/quote]
Employment from big boys (Apple, Facebook, Google) dwarf startups. Those skilled in AI/Machine Learning are making very good money and can easily outbid other tech guys in home purchases. Every sector wants these guys.
[/quote]
Sure, people with skills that are in demand will always make good money regardless of if they are at a start up or a large company. But stock options from start ups drive up housing prices in a unique way around here. When times are good in the bay, a lot of people get a large lump sum of cash from options…that often goes directly into local real estate.
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Inflation won’t happen till there is US wage inflation. …only then will the 10 year rates rise significantly.
BA people complain about the high cost of housing…But nationally healthcare and education are the real problem.
US average wages are down adjusted for inflation over the last 20 years…hence the shrinking middle class.
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