Fed’s Highest Rates In 15 Years To Fight Bidenflation Are Derailing the American Dream (Mortgage Rates Near High Since 2001, Home Costs Double)

Confounded Interest ^ | 12/19/2022 | Anthony B. Sanders

[Alberta's Child]

Not only that, but large home builders don't build 'starter' homes like in the past. Nimby and local interest also prevent the building of smaller 'affordable' homes.

Excellent point. I would suggest that there's a bigger factor at work here: Small, "affordable" homes have been displaced in the market by condominiums and townhouses. Smaller homes were more common when first-time buyers would live in them for a few years and then up-size or even build an addition on the small home.

I was shopping for a home in 2020-21. I was surprised to see how few small detached homes there were in the area where I was looking. Most of the homes that fit this description were very old.

I ended up buying a larger home than I really need -- and moved my business into one part of the home that can be accessed separately from the outside (so I can have clients and contractors visit my office without coming into my living space). It was a no-brainer for me. The cost of a fairly new, large detached home in this area was comparable to what they were asking for townhomes in the next county.

[HamiltonJay]

“How does raising the price for borrowing money make overall prices go down?”

As others have pointed out...

When you buy on credit, you are making your purchase based on your payment, not your final price directly.

Say for example your budget is $1000 a month for your mortgage payment, that means at 3% interest you can spend up to 240k on you home and stay within your “budget”. Will you buy a 240k home? Maybe, maybe not, but you can “purchase” up to that much based on the interest rates and the amount you wish to spend per month.

If the interest rates are 6%, and you only can or wish to spend a maximum of $1000 per month, the purchase price of the home you can afford is $170k at maximum.

When you borrow money to purchase something you aren’t being driven by total price, you are being driven by the payment you can afford (for most people), so interest rates affect what an item will sell for.

So lets use our $1000 per month buyer... let’s say for example, 80% of the buyers in pool of potential buyers can afford no more than $1000 a month... but 80% of the homes are selling at a price where payments will be above that amount. This means that 80% of the homes currently for sale are for sale out or price of 80% of the buyers... sure 20% of the market can afford 80% of the homes for sale, eventually this imbalance will come to a head, and the pool of homes for sale will not be able to find buyers, because their prices are too high... because the payment they require are beyond what sellers are willing to pay.

Banks can’t just lower interest rates, so the cost of borrowing the money to buy, eats up more of the payment meaning the only option the market has is to lower prices... and this doesn’t happen instantly, but it does happen.

Right now most of the Real Estate is still priced at 3% interest rates, the new reality is 6-8% interest rates... Sellers who don’t have to sell, can sit and wait it out.. however, those that decide they have to sell, will be facing a market with fewer buyers at that can afford the price points they could just a few years ago... this will overall drive down prices.

If everyone pays cash and doesn’t borrow money then inflation drives up prices, when you borrow money to buy items, and most real estate is purchased with borrowed money, prices get driven down.

Look at Used Cars, it should not surprise anyone that the bubble in that market collapsed like a rock, and interest rate hikes just exacerbated a bubble that was already ripe for the popping.