The 2013 housing market and my prediction for 2014


By iwog   Follow   Mon, 12 Aug 2013, 2:45pm   19,696 views   627 comments
In Lafayette CA 94549   Watch (0)   Share   Quote   Permalink   Like (4)   Dislike (9)  

Prices are going way up from here.

This is going to be a well supported analysis of the current housing market conditions and the implications for the future. Please put equal thought and support into your rebuttals. Most of this concerns California and although I'm not familiar with the rest of the country, California is generally a leading indicator of all things economic.

Being heavily invested in real estate, there are three things of particular importance to me at the present time. All three lead to my prediction of significantly higher prices:

1. How is the spike in mortgage rates impacting the market?
2. How is the spike in home prices impacting supply?
3. How does past market action in late summer compare to prior years?

To answer these questions, I require the most real time data source available. Case-Shiller and most other indices lag the true market by months so they are mostly useless except as a good measure of where we've been. As many know, I'm a fan of Redfin charts so I will concentrate on Redfin market data. I've pulled up the most populous 20 California counties to find out what is going on.

1. How is the spike in mortgage rates impacting the market? Mortgage rates crossed into the 4% territory at the end of May. Since a typical closing takes 15-45 days, there has been ample time to determine if higher mortgage rates have put a damper on listing and sales. There is no such blip in the data. Both listings and closings are well within 2013 trends. Mortgage rates are not relevant.

2. How is the spike in home prices impacting supply? For this we have an entire 18 months of steady price appreciation across almost all California markets. The number of listings in some markets have slightly increased, but in most cases those increases were either less than seasonal norms or have since reversed. The spike in home prices is not pulling more supply into the market.

3. How does past market action in late summer compare to prior years? In my opinion, this is the most important predictor of what will happen in 2014. Does late summer market conditions match years prior to a bull market, years prior to a bear market, or years prior to a flat market? The answer is unequivocally that market action in July and early August of 2013 matches the years leading up to the biggest gaining years both during the bubble and 2012.

I'm going to be using San Diego as my reference since posting 20 different California counties would be redundant. Almost all charts for all areas match what his happening in the San Diego market.

We are going higher in 2014. Probably much higher. Most California counties look like San Diego. Not only are the price gains continuing but new inventory is NOT forthcoming. Here is Los Angeles county just to demonstrate how consistent this is:

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  1. marcus


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    588   11:04am Fri 2 May 2014   Share   Quote   Permalink   Like   Dislike (1)  

    tatupu70 says

    marcus says

    I never said interest rates aren't even more highly correlated to inflation. I'm not going to apologize for this not being simple.

    If you understand this--then how can you continue to say there is a correlation between house prices and interest rates?

    Because it's complex.

    Real estate prices are affected by inflation. But it's also affected by the cost of debt, and income properties (for investment) are affected by the general expectations about return on investment.

    This entire argument is silly. The monthly payment for owning a home is in a very real sense the price people pay for a home. And this is STRONGLY affected by interest rates.

    The history you want to look at doesn't show this as well as it might because economics is always complex with many variables. In the period you're looking at, the baby boom becoming buyers, and women entering the workforce are probably bigger factors than interest rates or inflation.

  2. iwog


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    589   11:09am Fri 2 May 2014   Share   Quote   Permalink   Like   Dislike (1)  

    Inflation cannot kick in without a political revolution combined with wealth redistribution. As long as Republicans remain a roadblock, there will never be anything remotely resembling high inflation.

    Incomes will keep falling. I know several lawyers who have made their living for decades and are facing bankruptcy. Doctors are hurting. Engineers are hurting. This is the middle class end game. All the money is flowing to capitalists and they keep pressing to take more.

    What's left is debt and I expect debt to increase for a few years before the final crash. There will also be stimulus coming from the medical industry as they ramp up Obamacare.

    As a side note, the baby boomers are beginning to spend their retirement savings accounts and tapping equity in their homes. As a simple matter of economic Darwinism, the rich aren't going to let them keep much of it. They will gut the stock market while they still can and dump housing before the old folks move into cheaper digs.

  3. marcus


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    590   11:13am Fri 2 May 2014   Share   Quote   Permalink   Like (1)   Dislike (1)  

    iwog says

    As a side note, the baby boomers are beginning to spend their retirement savings accounts and tapping equity in their homes. As a simple matter of economic Darwinism, the rich aren't going to let them keep much of it. They will gut the stock market while they still can and dump housing before the old folks move into cheaper digs.

    You do have some good instincts. Although I hope you're wrong.

    A lot of people will be expecting this. So if you're right, it needs to happen in a way that fakes most of them out. That is, either earlier than expected. Or later, with one or two head fakes to the downside first.

  4. control point


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    591   11:42am Fri 2 May 2014   Share   Quote   Permalink   Like   Dislike  

    marcus says

    Real estate prices are affected by inflation. But it's also affected by the cost of debt, and income properties (for investment) are affected by the general expectations about return on investment.

    The cost of debt IS inflation plus risk premium.

    It does not change in a vacuum.

    Expected future value of money/current value of money = opportunity cost of money = inflation rate.

  5. tatupu70


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    592   11:43am Fri 2 May 2014   Share   Quote   Permalink   Like   Dislike  

    marcus says

    Here maybe if Iwog says it you'll understand.

    I understand but it's not relevent. I'm telling you what history says. If you're saying things are different now and going forward the historical relationship may not hold--well, that's a different discussion.

    You can't, however, state that historically there has been a correlation. Because there hasn't.

  6. tatupu70


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    593   11:47am Fri 2 May 2014   Share   Quote   Permalink   Like   Dislike  

    marcus says

    Because it's complex.

    Sure--but whether or not there's a correlation isn't. It's a simple mathemetical calculation.

    marcus says

    Real estate prices are affected by inflation. But it's also affected by the cost of debt, and income properties (for investment) are affected by the general expectations about return on investment.

    Yep--that's what I've been saying.

    marcus says

    This entire argument is silly. The monthly payment for owning a home is in a very real sense the price people pay for a home. And this is STRONGLY affected by interest rates.

    Yep, but more weakly than incomes.

    marcus says

    The history you want to look at doesn't show this as well as it might because economics is always complex with many variables. In the period you're looking at, the baby boom becoming buyers, and women entering the workforce are probably bigger factors than interest rates or inflation.

    I'm glad you understand my point.

  7. iwog


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    594   12:08pm Fri 2 May 2014   Share   Quote   Permalink   Like   Dislike (1)  

    marcus says

    A lot of people will be expecting this. So if you're right, it needs to happen in a way that fakes most of them out. That is, either earlier than expected. Or later, with one or two head fakes to the downside first.

    We've had the head fakes. The ocean of cash is waiting for the all clear and then it all goes into the stock market. Despite the bull market since 2009, we're just a little bit above values in 2000. That's 14 years with a market that has just barely peaked over the 14-year highs.

    Today would have been a strong day in the stock market except the Ukraine decided to go to war.

  8. marcus


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    595   3:49pm Fri 2 May 2014   Share   Quote   Permalink   Like   Dislike  

    tatupu70 says

    marcus says

    Because it's complex.

    Sure--but whether or not there's a correlation isn't. It's a simple mathemetical calculation.

    Yes. And say a perfect correlation of prices going up when interest rates going down would be a correlation of -1. A slightly less strong correlation would be a correlation of -.999 etc. Even a correlation of -.7 would be (in my book) a very strong correlation. A correlation of - 3, still very much a correlation.

    So yes, it's a simple computation. But it's not a yes or no calculation.

    In this case not only are you not saying what you mean by "there isn't a correlation," (although I know what that means). It's complicated. Sometimes there is a strong negative correlation, other times a strong positive correlation. Either one of us could probably come up with conditions for there being a positive correlation and conditions for when there is a strong negative correlation (what I have been saying exixts and you and Tatapu say does not).

    We also both can come up with significant time intervals of historical data that back up these claims.

    IT's not really that interesting an argument, but the underlying dynamics are interesting. It's a fascinating dynamic really. The fact that expectations of inflation can cause (are supposed to cause anyway) interest rates to go up. And high interest rates put a damper on prices. Conversely, a lack of inflation expectations can cause interest rates to go down, which in turn often cause capital assets to go up in price, because cheap borrowed money leverages higher prices.

  9. marcus


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    596   3:50pm Fri 2 May 2014   Share   Quote   Permalink   Like   Dislike  

    tatupu70 says

    I'm glad you understand my point.

    I don't have hardly any emotion about the degree to which you do not understand my point.

  10. marcus


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    597   4:00pm Fri 2 May 2014   Share   Quote   Permalink   Like   Dislike (1)  

    iwog says

    That's 14 years with a market that has just barely peaked over the 14-year highs.

    Yes, but that 14 year high was one that occurred as we went into the 21st century, which was a big psychological hurdle. IT was supposed to be like the jetsons here on the other side of the year 2000.

    So you reckon this consolidation WAS long enough for the market to digest
    the stock market move from 800 in 1982 to 14000 in 2000 ?

    And now we are off from a platform like the one from 1966 to 1982 to propel us up into the stratosphere ?

    Btw, I wonder if Tat thinks there is a correlation between what happened in the stock market from 1982 to 2000, and what happened to LT interest rates.

  11. marcus


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    598   4:07pm Fri 2 May 2014   Share   Quote   Permalink   Like   Dislike (1)  

    control point says

    The cost of debt IS inflation plus risk premium

    And when long term money can be borrowed for the same as expected inflation, or even less ? What does this do to prices of capital assets.

  12. marcus


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    599   4:13pm Fri 2 May 2014   Share   Quote   Permalink   Like   Dislike (1)  

    tatupu70 says

    I'm telling you what history says

    No you aren't.

    If I show you a significant period when housing was going up when mortgage money was getting dramatically cheaper, you'll say it doesn't count because incomes were going up. Those significant periods of time exist, and it's more than extremely obvious I'm right.

    Give it up man.

    marcus says

    YesYNot says

    When was the last time interest rates increased for a sustained period? What did housing prices do?

    When was the last time LT interest rates dropped for a sustained period?

    What did housing prices do?

    In the period you refer to interest rates were rising along with perceived high inflation in everything (not just asset values).

    During the protracted period when interest rates were dropping it was not deflationary except during recession, and even then incomes weren't dropping except due to layoffs.

    Can you put this all together?

  13. iwog


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    600   4:13pm Fri 2 May 2014   Share   Quote   Permalink   Like   Dislike (1)  

    marcus says

    So you reckon this consolidation WAS long enough for the market to digest

    the stock market move from 800 in 1982 to 14000 in 2000 ?

    Absolutely. Growth + profits + inflation result in a market that's currently priced about average.

    Now factory in a 100% money supply growth since 2005, a general raping of the bottom 80% who generally don't buy stocks anyway, and an exploding aristocracy that is becoming bored with their trust baby lifestyle and want to strike it rich about the same time that traditional investment returns are a joke.

    When this thing turns parabolic, everyone is going to jump on.

  14. control point


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    601   4:22pm Fri 2 May 2014   Share   Quote   Permalink   Like   Dislike  

    marcus says

    And when long term money can be borrowed for the same as expected inflation, or even less ? What does this do to prices of capital assets.

    Long term money cannot be borrowed for less than expected inflation. Inflation may turn out to be higher than expectations, but the long term bond market is telling you what the long term inflation expectation is right now.

    The yield curve even tells you when the market expects inflation to pick up.

  15. tatupu70


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    602   5:13pm Fri 2 May 2014   Share   Quote   Permalink   Like   Dislike  

    marcus says

    So yes, it's a simple computation. But it's not a yes or no calculation.

    Yes, it pretty much is. When I did the calculation over an approximately 80 year time period the correlation was positive 0.05 or so. In my mind that is no correlation.

    And if you really want to get tricky you can statistically determine whether a correlation exists to a 95% confidence--that is a yes or no answer.

  16. tatupu70


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    603   5:16pm Fri 2 May 2014   Share   Quote   Permalink   Like   Dislike  

    marcus says

    If I show you a significant period when housing was going up when mortgage money was getting dramatically cheaper, you'll say it doesn't count because incomes were going up. Those significant periods of time exist, and it's more than extremely obvious I'm right.

    I will do nothing of the sort. The only caveat I'll say is that you have to choose a large enough time period to make for a proper calculation. If you do so, I am very confident that you will find a different answer than you think you will.

  17. tatupu70


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    604   5:21pm Fri 2 May 2014   Share   Quote   Permalink   Like   Dislike  

    marcus says

    Btw, I wonder if Tat thinks there is a correlation between what happened in the stock market from 1982 to 2000, and what happened to LT interest rates.

    Of course there is. I've never done it, but I'm quite sure if you did the calculation you'd find that a pretty strong correlation exists between stock returns and interest rates.

  18. marcus


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    605   5:30pm Fri 2 May 2014   Share   Quote   Permalink   Like   Dislike (1)  

    control point says

    Inflation may turn out to be higher than expectations, but the long term bond market is telling you what the long term inflation expectation is right now.

    This is debatable. But I can only handle being in one extremely stupid debate at a time. What you say is usually true, but many including I would argue not always. These are unusual times. Can you say QE ?

    I used to believe what you say here. But in recent times I have come to see markets as more "rigged" than I used to. Also, markets, including the bond market can get out of whack do to things like, flight to quality, QE, strong international currency imbalances, what currency is the the worlds reserve currency and so forth. So I think your statement is an oversimplification. The bond market is a market, that takes many things in to account (besides inflation).

    tatupu70 says

    When I did the calculation over an approximately 80 year time period the correlation was positive 0.05 or so. In my mind that is no correlation.

    So we may finally get to an understanding, and lets say you get to feel you're right. I'm pissed that it's so fucking stupid, and that we got to this with such difficulty.

    Sometimes there is a very strong negative correlation between RE prices and interest rates. Sometimes there is a very strong positive correlation. It's even pretty simple to explain the conditions for both.

    By "sometimes" I mean time frames of multiple decades or more.

    You interpret this as no correlation. Since in your view the periods of strong positive correlation cancel out the long periods of negative correlation.

    I view this differently. There is no absolute answer to this. But I consider 15 to 30 year time frames significant, and I believe that understanding why there is a positive correlation (when there is), and why there is a negative correlation when there is are both extremely easy.

    Furthermore, I acknowledged that a period coming up, when and if inflation kicks in, could be one of the positive correlation times. But given the bizarre mix now, I'm not sure at all. A lot does depend on the bond market.

    But I'm very happy if you go away feeling vindicated and that you won the argument.

  19. YesYNot


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    606   5:54pm Fri 2 May 2014   Share   Quote   Permalink   Like   Dislike  

    Here's how housing and interest rates have gone over the last 30 years or so, which I believe Marcus referred to. I adjusted the Case-Shiller data to account for inflation. Inflation was done yearly, but it averaged to about 2-3%.

    edited to fix chart

  20. marcus


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    607   6:08pm Fri 2 May 2014   Share   Quote   Permalink   Like   Dislike (1)  

    YesYNot says

    Here's how housing and interest rates have gone over the last 30 years or so, which I believe Marcus referred to.

    Why inflation adjusted RE prices ? That wasn't my point. In fact interest rates dropping when inflation exists is one of the primary conditions leading to a period when interest rates are very negatively correlated with RE prices (such as the period in your window.

    Although the correlation can even be seen there (not including the aberration of 2007 - 2012). Maybe some will want to plot RE prices against Interest rates to see the correlation. But it is obvious.

  21. tatupu70


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    608   6:13pm Fri 2 May 2014   Share   Quote   Permalink   Like   Dislike  

    marcus says

    I'm pissed that it's so fucking stupid, and that we got to this with such difficulty.

    OK--I don't think it's stupid at all. IMO, this is an important topic because many people on here assume that as interest rates rise, house prices are going to crater or at least fall in nominal terms. But when you look at what happens historically, this is anything but certain. That's the point I wanted to make.

  22. YesYNot


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    609   6:18pm Fri 2 May 2014   Share   Quote   Permalink   Like   Dislike  

    I chose to adjust for inflation, because RE prices have gone up in every 30 year period you can think of. This is because RE generally goes up with inflation. Adjusting for inflation is a way to remove this fairly well known appreciation effect.

    marcus says

    Although the correlation can even be seen there (not including the aberration of 2007 - 2012)

    You can't just exclude the part of the data that don't agree with your theory.

    So, while interest rates have gone from 10 down to 4%, national housing has been volatile but has gone with inflation give or take. I picked the years, b/c that was where the CS data started. I'd say that over this period, housing has been pretty immune to the large change in interest rates.

    If you stop worrying about black swans and this time it's different yada yada, you might expect that housing will continue to follow the 3% inflation + - 10 or 20%.

  23. tatupu70


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    610   6:18pm Fri 2 May 2014   Share   Quote   Permalink   Like   Dislike  

    marcus says

    Why inflation adjusted RE prices ? That wasn't my point.

    Although the correlation can even be seen there (not including the aberration of 2007 - 2012). Maybe some will want to plot RE prices against Interest rates to see the correlation. But it is obvious.

    Not to continue this well past the point of interest, but looking at the graph, interest rates pretty much fell for 30 years straight. Home prices went up for 5 years, down for ~10 years, then up for 10 years, down for 3-4 years, then flat for 4 years.

    How do you conclude there's a correlation there?

  24. marcus


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    611   6:21pm Fri 2 May 2014   Share   Quote   Permalink   Like   Dislike (1)  

    tatupu70 says

    many people on here assume that as interest rates rise, house prices are going to crater or at least fall in nominal terms.

    This can happen and in fact should, with all else being equal. If interest rates were to rise dramatically for reasons other than inflation expectations, then housing prices would drop. And even if interest rates are going up because of inflation expectations, at some point the fed might repeat what Volker did which would put the kabash on RE appreciation (at that point).

    Also, what if inflation and interest rates are going up, but incomes aren't, as they were last time inflation and rates were rising a lot ?

    It's really hard to say. But I've had enough experience trading to know that I don't know.

  25. marcus


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    612   6:34pm Fri 2 May 2014   Share   Quote   Permalink   Like   Dislike (1)  

    tatupu70 says

    How do you conclude there's a correlation there?

    Jeez.

    **To see correlation you would plot say interest rates on the horizontal axis and RE prices on the vertical and take time out of it.

    I will acknowledge that the 2007 - 2013 data obfuscates it. Am I cherry picking, or is this an extremely anomalous time ? You decide.

    But if you did what I said ** using data from 1983 - 2006, you would see a very nice downward pattern and a VERY significant negative correlation.

    Do the same from say 1950 - 1980, (strongest 1968 - 1980) and you would see a very nice positive correlation.

  26. YesYNot


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    613   6:39pm Fri 2 May 2014   Share   Quote   Permalink   Like   Dislike  

    Maybe the question is, why do people on Patnet expect that we will have high interest rates in the absence of any inflationary pressure?

    Do you have such expectations Marcus? I've not read any convincing argument around here.

    Even if we were to have mortgage rates increase without any other changes, the net effect would not necessarily be lower prices. Buyers would not want to buy at current prices, because monthly payments would increase. On the flip side, sellers would either not be able to sell at reduced prices (mortgage) or not want to sell at reduced prices. After all, sellers still have their low interest rate loan locked in, and their monthly balance is based on their locked in rate. So, you would have a slow down in sales, but prices might not be so predictable.

  27. tatupu70


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    614   7:01pm Fri 2 May 2014   Share   Quote   Permalink   Like   Dislike  

    marcus says

    But if you did what I said ** using data from 1983 - 2006, you would see a very nice downward pattern and a VERY significant negative correlation.

    You'd be wrong. Look again-from 1987 to 1997, there is a very slight positive correlation--rates down, prices down. IMO, the period from 1997 to 2006 is the anomaly.

  28. iwog


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    615   7:03pm Fri 2 May 2014   Share   Quote   Permalink   Like (2)   Dislike (1)  

    YesYNot says

    Maybe the question is, why do people on Patnet expect that we will have high interest rates in the absence of any inflationary pressure?

    Because people are comfortable with higher interest rates. They have experienced it before and live my the motto "What goes down must eventually go back up."

    They ignore places like Japan where rates went down, stayed down, and most of the population will probably die before they go up again.

    Think ZIRP is going away soon?

  29. marcus


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    616   8:28pm Fri 2 May 2014   Share   Quote   Permalink   Like   Dislike (1)  

    Japans population is decreasing.

  30. marcus


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    617   8:41pm Fri 2 May 2014   Share   Quote   Permalink   Like   Dislike (1)  

    tatupu70 says

    You'd be wrong

    I'm not going to do this anymore. But I'll say it again for anyone who cares or even knows what correlation means.

    FACTS: On a horizontal axis put interest rates increasing from right to left.

    On a vertical axis put RE price data, with higher prices higher.

    Take every one of the data points that occur from 1983 to 2006 and plot them, time is irrelevant on the graph you get, (all the data points come from that time interval - but the graph doesn't tell you when.)

    The pattern will not be a perfect descending line. But there will be a very clear tendency for the higher interest rate values to be associated with lower prices, and the lower interest rates to be associated with higher prices.

    MY guess would be r = -.6 to -.7

    You don't think that 2007 on is anomolous ? What the fuck man. You're arguing for the sake of arguing.

    Sure prices being lower wasn't an anomoly, but the actual drop in prices ? That was due to a massive deleveraging financial event. Several reasons that I think we all understand.

    In any case okay. You don't get it, and you like to win arguments. That's all I've learned in this debate.

  31. Rew


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    618   10:24pm Fri 2 May 2014   Share   Quote   Permalink   Like (1)   Dislike (1)  

    marcus says

    I'm not going to do this anymore. But I'll say it again for anyone who cares or even knows what correlation means.

    http://www.bankrate.com/finance/mortgages/rising-rates-lower-house-prices.aspx

    http://www.forbes.com/sites/billconerly/2012/12/18/when-mortgage-rates-rise-will-home-prices-fall/

    http://www.calculatedriskblog.com/2013/06/house-prices-and-mortgage-rates.html

    ... I'll stop there, but you can read the first couple paragraphs of each and they all say: No correlation exists between interest rates and home prices, though would by homebuyers are comforted to think they might be.

  32. marcus


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    619   10:35pm Fri 2 May 2014   Share   Quote   Permalink   Like   Dislike (1)  

    Meaning that the author, like Tat, concludes that since interest rates sometimes have a positive correlation to RE price, and other protracted periods they have a negative correlation, that therefore these cancel eachother out, and we can not therefore say there is a correlation. (Actually, like Tat, the authors may not understand this.)

    I consider this a legitimate view.

    I guess if it helps you, think of me as making a different point, rather than a contradictory one. And that is that over some fairly long periods interest rates have a positive correlation to interest rates. Over other significant periods there is a negative correlation.

    I understand why some hold that there is no correlation.

    For further understanding of the obvious, you might want to explore the ways in which future income streams are valued by the financial world. They are valued almost entirely as a function of current interest rates. Plug in a higher rate, you get a lower value. This is finance 101.

  33. Reality


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    620   5:36am Sat 3 May 2014   Share   Quote   Permalink   Like   Dislike  

    Real estate price is a multi-variable function, with at least the following input variables:

    Expected rental revenue (or owner equivalent rent);
    Interest rate (real interest rate discounting future cash flow);
    Other costs of carry (taxes, maintenance, insurance, etc.);
    Price movement momentum (e.g. mass hysteria);
    particular circumstances of the property, buyer and seller.

    When all else is equal, the price is of course negatively correlated to interest rate (real interest rate, having accounted for expected inflation). In real life statistics however all else are not usually equal when comparing different time periods. So its a folly to expect scientific A/B test on data that is of historical nature and not repeatable in a lab for proper isolation of variables.

    Austrians are actually better mathematicians than the Keynesian idiots who are often failures at pursuing math careers.

  34. tatupu70


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    621   5:40am Sat 3 May 2014   Share   Quote   Permalink   Like   Dislike  

    marcus says

    Meaning that the author, like Tat, concludes that since interest rates sometimes have a positive correlation to RE price, and other protracted periods they have a negative correlation, that therefore these cancel eachother out, and we can not therefore say there is a correlation.

    They don't cancel each other out, they show that there is no correlation. I'm thinking maybe you don't understand what the term means:

    correlation /cor·re·la·tion/ (kor″ĕ-la´shun) in statistics, the degree and direction of association of variable phenomena; how well one can be predicted from the other.

    The key is the 2nd sentence. How well can one be predicted from the other. As you say, sometimes there is a positive relationship, sometimes negative. No predictive power.

    marcus says

    The pattern will not be a perfect descending line. But there will be a very clear tendency for the higher interest rate values to be associated with lower prices, and the lower interest rates to be associated with higher prices.

    MY guess would be r = -.6 to -.7

    And I'll tell you that you can't do that because inflation will overwhelm your signal. You'd get a much better correlation between time and price.

    You should look at price change % vs. interest rate. When I did that, it came out at r = +0.015 or so.

    marcus says

    For further understanding of the obvious, you might want to explore the ways in which future income streams are valued by the financial world. They are valued almost entirely as a function of current interest rates. Plug in a higher rate, you get a lower value. This is finance 101.

    Why do you keep bringing this up? Houses aren't like stocks and bonds--that's the point here.

  35. YesYNot


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    622   6:43am Sat 3 May 2014   Share   Quote   Permalink   Like   Dislike  

    marcus says

    Meaning that the author, like Tat, concludes that since interest rates sometimes have a positive correlation to RE price, and other protracted periods they have a negative correlation, that therefore these cancel eachother out, and we can not therefore say there is a correlation. (Actually, like Tat, the authors may not understand this.)

    Like Tat says, there is no long term correlation. There is only noise, and random fluctuations that you are trying to assign meaning to. You are failing to see the forest for the trees.
    marcus says

    I guess if it helps you, think of me as making a different point, rather than a contradictory one. And that is that over some fairly long periods interest rates have a positive correlation to interest rates. Over other significant periods there is a negative correlation.

    No one is denying that you can find time periods where there are positive and negative correlations. The price changes in these periods were not driven by the interest rates. They are just noise. If they were driven by interest rates, they would all be correlated in the same direction. We are stating that on the whole, historical data do not in any way back up your claim that an increase in interest rates will cause prices to decline.

    marcus says

    For further understanding of the obvious, you might want to explore the ways in which future income streams are valued by the financial world. They are valued almost entirely as a function of current interest rates. Plug in a higher rate, you get a lower value. This is finance 101.

    So, a net present value calculation uses a discount rate to discount the value of future cash streams. The expected cash flow is in the numerator and the discount rate is in the denominator. No one is arguing these basic facts. Most are arguing that the discount rate never changes independently from the cash flow. In fact, there are other forces that make the expected future income stream correlated with the discount rate. Things are a little different for a cash investor, where the discount rate is tied to the expected rate of other investments (opportunity cost) and the leveraged buyer, where most of the discount rate is tied to a mortgage cost.
    The net effect of all of this over long enough time periods is apparently that there is no significant correlation between mortgage rates and house prices.

    YesYNot says

    Maybe the question is, why do people on Patnet expect that we will have high interest rates in the absence of any inflationary pressure?

    So, I ask again, why do you think that we will have high interest rates in the absence of inflationary pressure? I'm using the term interest rates generally to include mortgage rates and expected returns on investments. The inflationary pressure would cause expected cash flow to increase in the future. You keep acting like we need to understand a net present value calculation, but you ignore the relevant questions about how it works.

  36. Call it Crazy


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    623   6:57am Sat 3 May 2014   Share   Quote   Permalink   Like   Dislike  

    Rew says

    ... I'll stop there, but you can read the first couple paragraphs of each and they all say: No correlation exists between interest rates and home prices, though would by homebuyers are comforted to think they might be.

    Well, there actually is a correlation between prices/rates. Many people, when qualifying for a mortgage, shop for houses at the top range of what they can afford on a payment. (since many buy "payments" not "houses")... So, math shows us that a rise of 1% in mortgage rates reduces affordability by 10% on what that person can buy/mortgage...

    So, maybe directly, house prices don't drop instantly rates rise, but a couple who is shopping for a house at say a maximum $2500/month payment, will have to lower their price point 10% if interest rates rise 1% to stay at the same monthly payment...

  37. marcus


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    624   7:04am Sat 3 May 2014   Share   Quote   Permalink   Like   Dislike (1)  

    YesYNot says

    No one is denying that you can find time periods where there are positive and negative correlations. The price changes in these periods were not driven by the interest rates.

    I didn't say they were. What's that saying about correlation and causation ? IF anything (and quite obviously), the positive correlation occurring in the seventies with inflation actually driving interest rates, is something I'm pretty sure even idiots don't deny.

    YesYNot says

    So, I ask again, why do you think that we will have high interest rates in the absence of inflationary pressure?

    I didn't say I think we will. And in fact I'm not predicting that.

    YesYNot says

    You keep acting like we need to understand a net present value calculation, but you ignore the relevant questions about how it works.

    Because only a total fool would deny this. It affects valuations of income streams and it also affects the monthly payment a family can afford to make.

    During a protracted period when inflation was bound to a range of 2 to 4% and yet LT interest rates were dropping further and further, especially the part of the drop that was from say 9% to 5%, in the absence of deflation with steady low inflation, this was extremely highly correlated with rising RE prices, for this period, for incredibly obvious reasons I have described more than once.

    The other long period when interest rates were rising (pre 1980), I think you'll find many who say that this correlates with increasing inflation, and since most even define interest rates as having an inflation premium this in no surprise. Need I argue why inflation and rising house prices are correlated over significant periods of time ?

  38. marcus


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    625   7:51am Sat 3 May 2014   Share   Quote   Permalink   Like   Dislike  

    This argument is so stupid.

    Some might argue that there is no single trend in interest rates during last 60 years. They wouldn't be wrong. Some will argue it's a random walk.

    Another person might say, that the way they look at it, there was 30 year period or so of an up trend, and a clear 30 year period of down trend.


    Housing prices were trending up most of the entire time.

    SO anyone that wants to argue that there isn't a positive correlation between interest rates and RE prices during the first period, and a negative correlation during the second period, is either a total idiot, or they don't understand what correlation means.

    (again - I'm not saying the people who claim no correlation are wrong. They are no more wrong than the people who say there is no single trend in interest rates the past 60 years)

    Yes, I've drifted off in to talking about both 30 year periods being understandable, (especially key parts of each period) but that was not my primary argument.

    I'm done with this.

  39. tatupu70


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    626   7:56am Sat 3 May 2014   Share   Quote   Permalink   Like   Dislike  

    marcus says

    Housing prices were trending up most of the entire time.

    Housing prices have been trending up for all times. Clearly it's NOT correlated with interest rates. I really don't think you know what correlation means.

  40. YesYNot


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    627   8:08am Sat 3 May 2014   Share   Quote   Permalink   Like   Dislike  

    marcus says

    This argument is so stupid.

    Hey - we agree :).

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