Low Rates Enabled Speculative Excess, Not Higher ‘Values’
Rich Toscano writes at the Voice of San Diego “It is a fairly common tactic among housing-industry cheerleaders to cite low interest rates as an ‘economic fundamental’ underpinning current housing valuations. Lower interest rates mean lower monthly payments, and lower monthly payments justify higher home prices. Therefore, low interest rates make homes more valuable.”
“That this point of view is widely accepted is unsurprising. It is seductively simple to think that sale prices are irrelevant as long as monthly payments remain reasonable. But there are some problems with the argument that low interest rates should result in higher home prices.”
“If one treats a home as an investment, and it seems very clear that most San Diegans do view their homes as investments, then the cost of financing that investment is irrelevant.”
“After all, if I lend you money one day to buy a stock, and then the next day I lower the rate I am charging you for the loan; did the stock suddenly become more valuable on that second day? It sure didn’t. So why should a house be considered more valuable based on the rate at which one can borrow money to purchase it?”
“As a matter of fact, this same reasoning applies whether you consider the home an investment or not. If the checker at your local Vons charged you extra for that box of Cap’n Crunch because he found out that the bank had lowered your credit-card rate, would that go over well with you? Apparently the housing permabulls wouldn’t mind, because the monthly payments on the Cap’n Crunch stayed the same.”
“Now that rates have risen somewhat, and monthly payments with them, does this imply that home prices should have declined? If and when rates rise further, will homes become even less valuable?”
“To be clear, interest rates are important. Unusually low rates have allowed San Diego homebuyers to bid home prices up to previously unimaginable levels. But the speculative excess enabled by low rates will prove neither healthy nor long-lasting.”
“The idea that low interest rates make homes more fundamentally valuable is neither logically sound nor supported by the historical data. There are many fundamental factors that legitimately and sustainably influence home prices, but the level of interest rates is not one of them.”