Peak Homebuying Window

 People decry high interest rates, but buying a house after a long spell of high interest rates is actually amazing: Once you buy the price is fixed--but you can always refinance to a lower rate. Admittedly, when rates spike, the housing market shuts down, and no one buys anything. Housing prices are sticky, so it takes a long time for them to adjust to lower prices. However, high rates also mean inflation, which takes the sting away: inflation drives housing prices up, even as financing costs are trying to drive them down.

Housing prices aren't a measure of affordability--the monthly payment is. And there is a mathematical relationship between interest rate and the price of an asset. In Economese: "When rates rise, the discount rate increases, reducing the present value of future cash flows and lowering asset prices"

When rates are low, both building* and borrowing are easy. But when rates rise, it costs more to borrow money, raising the monthly payment for the same loan amount. But income does not rise with financing costs, so buyers can only manage a smaller loan, for a worse location. Less demand for houses in better locations, and with fixed supply, that should lower prices. But house prices are sticky--someone who bought a house for $500,000 isn't going to sell it for $400,000 (How would they pay off their mortgage?).

But while rates remain high, the value of the home has fallen. It falls to inflation to balance things out. Over eleven years, even at 2% inflation, values go up 25%, and some with a $500,000 mortgage can sell for $500,000.

The best time to buy a house is always when rates fall - homeowners don't mentally reprice their asking price, even when shifts in the mortgage rate radically affect monthly payments. For example, on a $300,000 mortgage over 30 years:

At 3%: ~$1,265/month

At 4%: ~$1,432/month

Difference: ~$167/month (or ~$60,000 total over 30 years)

If an income previously supported a $1432/month mortgage payment at 4%, and rates drop to 3%, that supports an additional $35,000 worth of mortgage. A change that realtors have long** been slow to price in.

The 'Golden Age' is when rates have been high for a long time (long enough for inflation to 'float' everyone trapped in by a lower rate mortgage) and then rates start to come down.

*Builders operate almost entirely using borrowed money. When rates rise, it affects builders first. Even after they cease production of new houses, it takes months for homes under construction to finish, so the 'pipeline' of new stock that affects supply takes weeks to run dry.

**Less true today, thanks to Zillow and similar services, which have a large customer base, letting them spread research and analysis costs over multiple customers, enabling level of home price analysis far beyond the historical norm. Realtors were long dependent on 'comps' (comparisons) for recently sold homes, which lagged market prices by months.