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.

Troy says

Wages are still 4X or more higher here than most everywhere else we’re trading with.

Wages aren't everything though. You incur a lot of other costs doing business overseas. I just saw an article where a US company is moving jobs back from China to the US because the wage difference is shrinking and the transportation, communication, and quality costs are more than the wage difference. In their opinion at least.

Here's a better graph:

The light blue line is 30 year interest rates per the Fed.

Troy says

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.

And what would one expect for 330K? I would agree with your analysis.

tatupu70 says

Wages aren’t everything though. You incur a lot of other costs doing business overseas. I just saw an article where a US company is moving jobs back from China to the US because the wage difference is shrinking and the transportation, communication, and quality costs are more than the wage difference. In their opinion at least.

LOL! they are moving back because housing costs are down as are employee costs. Dont expect them to be coming back around these parts. They are being moved back to lower costing states, not California certainly.

thomas.wong1986 says

LOL! they are moving back because housing costs are down as are employee costs. Dont expect them to be coming back around these parts. They are being moved back to lower costing states, not California certainly

Nope-- This particular company wasn't moving back to CA. CA is not a good state for manufacturing, no doubt about it.

At the end of the day, the "average" American only cares about one thing - how much will this cost me? That cost is measured in two ways. The cost today (e.g. how much do I need to put down) and the cost per month.

So as much there may be a loose correlation between interest rates and prices, we should all bear in mind how much the lending landscape has changed. Heck we all agree that loose lending helped get us into this mess, and even today, you still only need to put 3.5% down --- a far cry from the 10% or 20% that "historically" was required.

As far as predicting rates, what rate are you predicing, and what time frame are you using. My personal prediction is that morgate rates wil bounce around between just under 4.5% and just over 5.25% over the next six to twelve months.

Then again, I also expect that sometime between labor day and Halloween, the stock market will have a one day drop of 1000+ points. I guess I'll have to check back around Thanksgiving to see how right (or more probably, how wrong) I was.

For the record my opinion is that as much as I want to believe that house are still overpriced, the low interest rates do help push prices up since once can "buy more house". As much as I am reluctant to admit it, prices in my area are probably closer to the bottom than I care to admit to. Expecting prices to revert to 1999 levels is not realistic, at least not in my area.