What is the relationship between mortgage rates and housing prices?

I didn’t even read the articles you linked to, because I know this for a fact. It’s a large part of my investing strategy.

However, it’s not as simple as “Higher interest rates equal lower home prices. Or lower interest rates equal higher home prices.”

So let me explain…

Low interest rates essentially mean you can borrow money for cheap. When you can borrow large sums of money for a small cost, you can afford to buy more expensive things… like big expensive homes.

Home sellers understand this and jack up their prices to meet the capability of the market, which is that buyers can afford more.

But, just because interest rates are low does not always mean that it’s necessarily cheap to borrow money. You have to compare interest rates with inflation.

For example, in the 1980’s interest rates were in the mid-teens. But, so was the inflation rate.

This means that the actual cost to borrow money was about the same as today, because we currently have low rates AND low inflation.

For the US, this low inflation rate is a problem. It’s sending the value of the dollar higher and higher.

For US dollar holders, we all feel like rock stars. We can buy all kinds of stuff for cheap and travel the world with great exchange rates.

BUT, for other countries, it’s getting more and more expensive to buy US stuff. Eventually, it will become so expensive that countries will not want to do trade with the US. That is why the US wants a higher inflation rate, so they can stay competitive with the rest of the world.

(That’s also why there is a worldwide currency war going on with different countries manipulating their currencies so they can stay competitive in the world market.)

Going back to your question about interest rates correlating to housing prices…

In the US, if we look at the actual cost of borrowing we’ll see that interest rates change in an attempt to match inflation. That is what the Federal Reserve is trying to do (among other market manipulations).

The nominal interest rate is what you see in the news. The real interest rate is what we have when we compare inflation.

So if the real interest rate becomes more expensive, then the cost of real estate will go down, and vice versa.

Another great way to look at this (somewhat complicated) topic is to compare foreign real estate.

For example, in much of Latin America real estate loans can have a 1.5% rate PER MONTH. That makes for an annual rate of well over 15%! That’s crazy for people used to real estate loans for less than 5%.

These high borrowing costs make real estate much cheaper because the finance cost is so high. Now, these countries also have their own issues with inflation, but the point is that real estate in regions with high interest rates (high costs of borrowing money) see depressed real estate prices.

This is especially apparent today in countries that have had currencies that have been wrecked. Chile, Colombia, South Africa, and Mexico are just some examples.

Real estate in those countries is often less than the cost of construction. And if you look at the housing market in 2010 in the US, when there was a similar situation, we all know that this means there is tremendous value.

I write about this stuff several times a week for free. I also invest in these areas because I realize how much value there is out there that few people are taking advantage of.

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