Low mortgage rates = Good time to buy?

I keep seeing this claim in discussion of real estate, but it doesn’t seem like it holds water.

Here’s a recent example thread:

On its face, low mortgage rates seem like they would make a good time to buy. Lower borrowing costs mean that owning will be cheaper, you can lock in a low fixed rate loan and secure those savings in the long term. Low interest loans certainly make other capital expenditures more attractive, but I don’t think it’s that way with houses, for a few reasons.

  1. House prices are strongly correlated with interest rates in a way that is generally not true of car prices or, say, industrial machinery prices. My understanding is that people generally tend to prices houses based on what they can get approved loans for, and their loan approval amount is based on the monthly payment. So total cost of ownership in any given snapshot of the market is probably pretty similar. However, when rates go down, the approval limits go up, which makes house prices boom. Although house prices have fallen from their peak in most places, we are still, historically, in one of those boom times, and rates are still historically low, meaning that when they do go up, house prices are likely to drop further.

  2. You can always refinance if rates drop. If you buy a house with an expensive loan, you are probably paying less in real dollars for it (because the market is lower due to higher borrowing costs). On average, your cost of ownership if rates stay the same or rise is pretty similar to the cost of ownership for someone who bought the same house for more money, with a more expensive loan. However if rates fall, you can refinance and pay even less. Someone who buys when rates are low can’t ever do so.

  3. Adjustable-rate loans are safer when rates are high. High rates can, of course, always go higher, which can make it hard to pay when the rate adjusts, but they at least can go lower. Getting an adjustable rate mortgage when rates are very low is much more risky, because rates can not effectively drop below a few percent.

  4. The mortgage interest deduction will be larger when a larger portion of your house payment is interest.
    My guess is that most if not all of these factors are pretty-well factored into the market for houses, which makes the benefits of buying when rates are high actually very slight, or negligible. But that means that, at best, mortgage rates are immaterial when it comes to buying housing, right?

What standard are you using to define this as a “boom” time? Housing prices have fallen for the past three years and continue to fall, even as the interest rates fall. Wouldn’t this indicate that the interest rate is best a VERY POOR predictor of home values, and more likely a completely useless predictor? When interest rates were at their absolute highest ever in the 1970s, home values were going up. Now that interest rates are at their absolute lowest ever, and home values are going down. No matter what common sense tells you what SHOULD happen, the honest to goodness truth is you can NOT use the interest rate to predict where home values are going.

Interest rates can be at 0% and if a bank won’t loan you the money to purchase, guess what?
You don’t get to buy it or utilize the 0% interest rate.

I’m using the [to claim that we’re still in “boom” times, when it comes to housing prices. As of Dec, 2009, the index stood at 136, which puts it above the peak of every other housing boom on record, save the current one (which peaked much higher, but is still dropping)

[url=http://yellowroad.wallstreetexaminer.com/blogs/wp-content/uploads/2009/03/case-shiller-chart-updated.png]Graph](]Case-Shiller Index[/url).

The data points you mention regarding now and the 70s are interesting. If there really isn’t much correlation between interest rate and housing prices, that would certainly explain my confusion.

There may be a correlation over a long span of time, but if I bought my house for 100K when itnerest rates were 4%, it’s unlikely that houses in my neighborhood are going to sell for below that just because rates went up to 5%.

Low interest rates may relate to an inflation of prices, similar to the way easy credit can lead to market inflation. But tightening the credit up by a percentage point or two in no way effects housing all THAT much.

I think your arguement has some flaws.

Last year I purchased a home for $250,000 with 20% down. Loan interest .04875, totaaly payment payment $1140, interst at start $812.50.

If interest goes up one point to 0.05875 to keep the same monthly interest and 20% down the new price would be $201,595

2 points $177,272

I do not see this kind of price drop.
Right now I can rent it for $1600 to $1800 a month. Those numbers support the price.
And as buying when interst is up and doing a refi when they drop. When ever a new loan is written there are closing costs that could wipe out any savings.

To buy just because interest rates are low is not a good Idea. You need to run all the numbers before making the deal.

While this is true, you are still going to be paying more with a higher interest rate. You don’t get a 100% refund of your interest. Most likely (generic) you pay between 25-33% in federal taxes. So you are still paying 2/3 to 3/4 of your interest.

As a general rule of thumb, if your percentage goes down by 1 point and you plan on owning the house for longer than 5 yrs, it’s a good idea to refinance. If you don’t plan on owning that long or moving or what have you, it’s not.