Seeking advice on timing & rates

[Greg R.]

I'm going to preface this with what I've said on other posts... I understand that no one has a crystal ball.

I'm going to be moving to Plano/ Rockwall TX in July/ August (can't move earlier due to kids in school). I'm planning on making offers on a principal residence around late May/ June.

According to every projection I've seen, rates are going to be (at least) 4.5+ on a 30 year fixed.

Is there a consensus that prices will have to drop if that's the case? Or will the insane prices continue no matter high the rates go? I'm not sure if we're in a period of time where in the next 6 months we'll see a market correction based on high rates and buyers not being able to qualify for as much.

I feel like I'm about to buy right at the peak of the 2008 bubble. Would it be better to rent for a year?

Any thoughts would be appreciated.

[Chris Mason]

Here's what some people with Ph.D after their names have said about the relationship between mortgage rates and real estate values. Note, they're concerned with causality. Sometimes rates go up when real estate values go up, and sometimes they go up when real estate values go down. You can't just point to the times you blew on the dice and got snake eyes as proof that blowing the dice causes snake eyes, you have to look at all the incidences of blowing on the dice. 

All of these academic articles are visible without any paywall or registration. The collection started in 2018, when we were last in a rising rate environment.

• The Housing Boom and the Decline in Mortgage Rates - 2021, NY Fed
• Can interest rates really control house prices? Effectiveness and implications for macroprudential policy - 2014, Journal of Banking & Finance
• Housing Prices at the Time of QEs in California: Effect of Mortgage Rates - 2017, International Journal of Financial Research
• Interest rates and house prices in the United States and around the world - 2017, Bank for International Settlements
• Real Interest Rate and House Prices in Malaysia: An Empirical Study - 2015, Economics Bulletin. 

The last one actually has an example of economists attributing, with causation, that real estate values went down because real estate mortgage rates went up (emphasis on the "because," as opposed to "at the same time as," which are not the same thing, as highlighted by our "I rolled snake eyes, ______ I blew on the dice" example). But here's the problem. They studied 5 regions of Malaysia. Home values only went down with statistical significance in one of the 5 regions. The academics, hilariously, concluded that people in that country are only "efficient" in the one region, and in the other 4 regions, the people aren't "efficient." Their model/theory/prediction is fine, you see, it's the people that aren't efficient. 

Anyways, here's the TLDR of the other 4.

- Real estate and housing demand is inelastic. Like gasoline. Is anyone here driving 20% less every day because gas is 20% more expensive? Didn't think so.

- Real estate has inertia. Family formation, job offers across the country, babies, old people dying, these things are largely not rate sensitive. And these things today is what represents demand tomorrow. No one in Fall 2021 said to their spouse "hey I think rates are going to be high in 9 months, so let's just cuddle tonight to ensure we don't outgrow our apartment in Q2 2022." But it is true that large group average sentiments, on happiness or sadness or optimism, may slow things down or speed them up, at the margins, and over time. 

- It may take upwards of 3 years of sustained high (or low) rates before rising rates has any measurable impact on home values. Something I will add (this is from me, not from an academic): Banks price discount points based on when they think rates will drop, in terms of "what's the break even point?" Has anyone else noticed discount point break-even points of 2 years or less, especially this last month? That means the banks are betting mortgage rates will come down before you break even on paying those points (if you buy the rate down and refi a year later, it's not like they have to refund you the discount points money, so they'd rather have the $ from you now than try to bet on collecting 5% on you for 2+ years).

- Real estate sales (as in, the number of sales) is sensitive to interest rates. 

- New house construction is sensitive to interest rates.

- "But but but didn't low rates in 2020/2021 cause the uptick in home values!" They certainly happened at the same time, but that does not equate to causality. Check out the 2021 article. 

None of us know what real estate values will do next week or next year, but I've not really seen anything compelling in terms interest rates and causation that had timeframes of less than 3 years. 

Anecdote: in the years leading up to the 2008 crash, the Fed had been jacking rates up to calm everyone down -- it had zero measurable effect (things KEPT going bonkers, from about 2005 to 2008 - 3 years - amid steady rate hikes). AFTER the 2008 crash, they lowered rates for years, again, with zero measurable impact, until several years had passed. The academics mentioned 3 years earlier, and we just saw that 3 years figure again. 2009 + 3 = 2012. Yup, that checks out, that's ballpark when things picked up again, after 3 sustained years of rate drops. I am not claiming that three years is a magic figure, but it jumped out at me while writing this (and it jumped out at me when reading one of the articles linked above), and seemed to line up.

JPOW and the Fed has a lot of power over the broad economy. Over real estate, however, they appear to be fairly weak. It looks like they have to do some stuff, which causes some other stuff in the broader economy, bla bla bla, which eventually, if they do the same stuff for 3ish years in a row, winds up impacting real estate, maybe and sometimes. They couldn't slow things down before the 2008 crash, they couldn't speed up the recovery afterwards, and the academics think the low rates had f-all to do with the jump in real estate values in 2020. Batting 0 for 3. 

Which, honestly, let's recall something: The Fed has 2 basic mandates. NEITHER of them has anything to do with real estate values. Inflation is one of the two mandates, but real estate values aren't even included in the official inflation 'basket of goods' that feeds into the inflation metric. So, literally, measured real estate values has zero impact on any of the things they're supposed to do (that's how you can have real estate appreciation be 3x the official inflation number - real estate isn't included!).