Understanding Interest Rates – Fed – Real Estate

One reader asks:

I found fascinating your understanding of the correlation between interest rates and real estate.  By your definition the slashing of interest rates by the Fed to all time low mortgage rates did not put a floor to real estate prices but exacerbated the low in real estate.  Essentially you are saying that if the Fed instead increased interest rates, real estate prices would not have fallen but increased?  Is your opinion really that interest rates and mortgage rates at all time lows (I have checked through history and have never seen mortgage rates this low) have not provided support or even a floor to prices falling further?

The Fed is always reactionary. It does not and cannot make the trend. Loer rates will not prevent real estate from declining any more than they prevented a 23 year decline in Japan. The assumptions you ask are far more complex. You assume the if the Fed cuts rates that saving is even passed on by the banks. It is not. They pay 0.5% now for 3 year money but want 4% fully collateralized from borrowers and will not lend to small business. It is always a BELL CURVE and never one for one. Had the Fed raised rates it would no more have supported the market than had it lowered rates. The market was saturated with too much bad loans in areas and that put a lot of foreclosures on the market that in turn brings down the price of homes not otherwise in trouble. The inverse effect of interest rates is always a diminishing one. So the first upticks will spark people to rush out and buy who have been waiting. Likewise, the last year of rates moving into the final high did not cause a decline because people were already holding back.  There is NO ONE FOR ONE relationship. It shifts prior to and after the turns.

The low rates help areas that were not in trouble before, but they will not magically cause the troubled areas to recover like Detroit. It is not simply interest rates. This is the real problem. Everyone wants to always reduce something to a single cause and effect. It is a delicate mixture of things and never just one. You have overall stories skeptical and people saying this is already a tired bull market after 4 years. What they are not looking at is the international capital flows.

CapitalFlow-Japan87-89(2)

For the 1987 Crash, they made the same mistake in reverse. They were all bullish domestically and the dollar was falling thanks to G5 so foreigners sold to American who were buyers. They could not understand the selling because interest rates did not rise, nor was there any change in domestic statistics. It was all the dollar.