House Prices and Interest Rates
by Tom on December 9, 2008
in Market Musings
Calculated Risk has a good analysis of the whole “4.5%” plan and why not only won’t it be achievable but it won’t provide the results that the government wants it to.
…...The WSJ article correctly noted that lower interest rates “increas[e] demand for homes”, but do they push up home values? The answer in the current environment is probably no.
However, housing is an imperfect market – house prices are sticky downwards and typically take several years to adjust (what we are seeing!) - so even though there is currently far too much supply, prices still have not fallen far enough to balance supply and demand…..
……An increase in demand from current renters deciding to buy, would probably only make a small dent in the huge excess supply. And house prices would continue to fall – so the goal of supporting house prices would not be met.
……In fact, it could be worse. Landlords, already struggling with high vacancy rates and falling rents, would probably lower their rents further and make the rent vs. buy decision more difficult again.
……So lower interest rates might not boost demand very much, it might just lead to lower rents.
Calculated Risk: House Prices and Interest Rates.
Read the entire article, but realize that if the government goes down that road, we are once again chasing a windmill and we aren’t going to accomplish the type of behavior that our economy needs…..
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