Interest Rates Effect on Home Prices

[Nate Crump]

Just thinking out loud here. I hear comments along the lines of, "jump in while interest rates are low/before they go up" all the time. I was wondering what the effect would be if they go up.

Always having been a huge believer in the invisible hand of economics (Adam Smith), and believing that Joe/Jane Home Buyer buys a home based on what they can afford monthly, it makes me think home prices would follow interest rates, maybe almost to scale with a few hiccups here and there.

If a family can afford $1,000 per month and can get a 4% interest rate, they might get a $200,000 home, give or take. But if down the road interest rates were, oh I don't know, 8% or so, they would maybe only be able to get a $130,000 home.

I don't think incomes would quickly and magically go up with interest rates, so it leads me to believe that over time, home prices would have to adjust and that $200,000 home would have to make its way toward $130,000.

I understand this is a very simplistic way of seeing it, but I wonder if any have any ideas?

It mostly makes me think that in all honesty, it wouldn't be the worst thing in the world for investors. Maybe a different type of investor would benefit, for sure. Those who can buy homes with cash. Especially if interest rates went back up to those mid-teens levels that I hear they were at in the 80's when I was just a kid.

Or, maybe there is still room for financing rental properties, and the fact that an interest rate jumps over a period of time from 4% to 8% or whatever, is countered by the fact that the price has dropped 30%, or 50%, and you just have to put a little more down up front, and there is more incentive to pay it off quicker rather than go get property number two.

I'd love to hear what some people think. As a disclaimer, although I have no proof, I actually believe whole-heartedly that some people simply think rates will go up, because "what goes up, must go down", and vice versa. I personally don't see why rates can't stay artificially low and suppressed by the Fed for decades to come, seeing as even the government is addicted to cheap money, and can't afford a rate hike on their massive debt, and the Fed is deathly scared of housing crashes, and inflating our money into oblivion is part of their plan.