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A Place To Live
There is a favorite line among Wall Street economists, one saved for the moment of a large rise in interest rates: "People are hurrying to buy houses because interest rates are going up."
Oh, really.
Occasionally, financial operators succeed in selling stock to clients when the Dow is going down like a stone. In bad markets, securities firms are prone to pushing the "buying opportunity" theory: the bottom may be falling out, but it's just a "correction," a great chance which shouldn't be missed.
But houses? Ordinary folks out shopping for a home?
Jack up interest rates, and the first thought in a buyer's mind is ... shouldn't I wail a bit? What if these new rates slow the market down? Do rising rates mean I'm about to pay the last high price in the neighborhood?
Many buyers will chase rapidly rising prices, figuring the same home will cost more next month. Runaway inflation psychology will cause people to buy a hoard of toothpaste if they think the price is rising fast enough.
But pursue pain? Stand in line to hurt?
Financial market economists can be forgiven some of their confusion. In the month or two after a jump in mortgage rates there is often a rise in home sales, but cause and effect are reversed in the mind of the economist. Fast home sales are often a sign of an overheating economy, the precursor of inflation, which causes rates to rise.
Sooner or later, high interest rates always put a damper on housing. Funny thing, though: higher rates seldom shut down a market all at once. Only wildly speculative markets tend to turn off the lights in an instant. There is a good reason for this resilience.
Most houses are bought for a simple, fundamental, non-speculative reason: people need a place to live.
People need homes in good markets and bad markets, and when interest rates are high, low, or in the middle. They need new houses because of growing families, shrinking families, new jobs, old jobs, higher income, or lower income.
People also buy houses for a whole bunch of ordinary, human reasons: you're bored with the old neighborhood, you've had it with living near the high school, too close to too much traffic, without a view, with that cramped kitchen, without a workshop, near horses, too near horses, in the wind, without a garage, with a big yard, without a garden
Though buyers are still buying for the old-fashion reasons, higher rates have triggered a detectable slowdown in our real estate market.
Though rates are still low by historical measures, the recent rise was a sharp one: mortgage rates are up almost a percent and a half from January lows. The last time rates rose like that, it was from 8.25% to 9.50% in early 1992, and the record lows which followed that spike are not likely to be repeated soon.
Maybe it's just whistling past the graveyard, but this pop in interest rates is in the long run a good thing for Boulder County. Since 1990, Boulder County home prices have risen to a reasonable level compared to income growth in the 1980's. However, one more year of explosive, 20%-plus price appreciation with interest rates at a 25-year low, and this market was going to be in trouble. Our reasonable adjustment in prices was going to turn into a latter day Boston, or Los Angeles with falling home values.
The national inflation rate has been only about 3% per year since our boom started. This is an awfully nice place to live, but not nice enough to justify endless appreciation at six times the inflation rate. Maybe higher interest rates will help our market cool down to only double the inflation rate.
Most folks would think a 6% value gain each year was no so bad. Besides, you get a place to live.
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