patrick.net

OK, I actually did some original research and overlaid real home prices (thick line) over interest rates (thin line)

Using Shiller’s data set from 1890 until the end of 2007

I think it's a BIG mistake to try to use dynamics from the 1970s, 80s, or even 90s to predict what's going to happen this decade and next. Using numbers from the 1910s is downright retarded.

In the Greesnpan era, interest rates were used to combat "inflation expectations" ie wage inflation by throwing people out of work via credit restriction.

This happened in 1995, 1999, and 2006.

But in the Bernanke era, we have already seen a willingness to try new and unusual measures to provide liquidity to the current system. I see no reason why this won't continue, and I think mortgage interest rates will go to 3% before we see 7.0% again.

This implies that buying now is NOT a bad strategy. Let's take an example:

$375,000 price 30 year @ 4.5% : $1700 carrying cost, $2300 actual cash outgo (includes principal repayment)
Refi $330,000 balance to 3% 15 year in 2015: $1300 carrying cost, $2800/mo cash outgo

If the above chart is any guide, rates aren't going to go up without concomitant wage inflation, which will be a wash for home prices, and also making the decision to buy now a win.

The only disaster would be rates going up but wages not. This would destroy the economy and giving the house to the bank would be advisable.

By game theory terms, the decision matrix is flashing BUY.

I agree somewhat but there's a big honking obvious singularity in that chart and I think it's a big mistake to look at any history previous to it.

IOW, the system reset itself in 1982 and until we get another Volcker at the helm of the Fed I think it's deceiving to look at the 1970s. Even if Volcker himself returned now, EVERYTHING is different between the 2010s and the 1970s. I've rattled off the differences dozens of times here so I won't do it again.

The main takeaway is that since 1982 the dominant interest rate regime has been DOWN. People say it can't continue but I disagree, 3% is still lower than 4.5%. $2600/mo buys a $415K house at 4.5% and a $450k house at 3%.

I'd LOVE to see a wage-price spiral this decade, but I just fail to see in which sector such a thing would take off. Wages are still 4X or more higher here than most everywhere else we're trading with.