What is the difference between a $100k 6% loan and a $125k 4% loan?

A single tall latte; or in other words, three bucks. That is the difference in monthly payments on the two thirty year home mortgages which is a key to understanding why what the Fed has been doing since the financial crisis hasn't restarted the housing market, in fact a pretty good case can be made that they're hurting the housing market (Good for apartment building investors only in a limited way because it's bad for the overall economy). Have a look at this chart, guess where the Taper Tantrum happened:

Clearly builders have thought that a chastened Fed holding rates low for an extended period would bring homebuyers in off the sidelines and just as clearly homebuyers are happy hiding behind the Gatorade cans down at the far end of the bench. 

One of the reasons for the failure to ignite is the latte answer up at the top. It does no good to drop interest rates to 4% if prices rise 25% because as it is often said people don't buy a house as much as a monthly payment and the payment on the 100k 6% loan is $605.40 and $602.40 on the 125k 4% loan. Woo hoo honey we can afford one latte a month now! So the lower interest rates aren't having the desired effect on homebuyers. This is particularly true with first time homebuyers who are the key to the whole market because first timers are who move-up buyers sell their houses to in order to buy their newer, bigger home.

The larger problem with what the Fed's been doing is that in rewarding the .1% they have failed generate any growth in labor participation or household income. Without those two drivers of consumer confidence not that many want to go out and take on a thirty year obligation even if they can save up the downpayment and qualify for the payments.

Some may be thinking But I'm a single family guy and my houses are rented and cash flowing, what's the big deal? Well just like for apartment investors in the short run things are good but if the economy and hiring doesn't pick up we'll all hit the rent ceiling where tenants just can't afford to pay more rent and then cash flow and appreciation will flat line.

For more on these issues see Grant Williams' latest Things That Make You Go Hmmm... and Ramsey Su's piece on Acting-Man.com As a bonus you can see a nice Monet!