There is a graph showing rents over time, price/income over time, and mortgage affordability over time. This isn't news to any readers here, but:
1) The bubble wasn't driven by low-income markets. Mortgage affordability was steady in low-income cities from 1995 to 2005 while it shot up nearly 50% in high income cities.
2) Whatever is causing housing starts to top out now, it sure as heck isn't high mortgage rates. Mortgage affordability in low-income cities is well below any pre-crisis level.
The thing about low mortgage rates is that a low interest environment actually has some redistributive qualities. Think of the housing market. Home prices are somewhat sensitive to long term real interest rates. So, when rates are low, people with wealth must pony up larger sums to purchase a home. But borrowers shouldn't really care so much about the price. If they can borrow cheaply, their liabilities and assets get matched up, and they can take out a mortgage with low payments and start to accumulate equity. (Obviously, buyers must be careful about purchasing homes in low rate environments if they may need to sell the home soon when rates are higher, etc.) But, this redistribution can't really happen if mortgage rates are low because there are obstacles to lending that correlate with socioeconomic status.
2) Whatever is causing housing starts to top out now, it sure as heck isn't high mortgage rates. Mortgage affordability in low-income cities is well below any pre-crisis level.--KE
ReplyDeleteI am missing something....
What are you missing?
DeleteHigher interest rates make housing less affordable. So housing starts decline. You say that is not the picture.
ReplyDeleteMy point is that both interest rates and starts are very low and affordability for borrowers is quite high. If interest rates were the binding constraint right now, that wouldn't make any sense.
DeleteOkay, the "Housing Affordability" chart you have there. The second hart. Am I reading is upside-down? I read the chart as showing housing affordability generally declining until 2012, and then drifting up...but it is the other way around?
ReplyDeleteYou're reading right and just about anyone who bought a house between 1968 and 2003 is saying sarcastically, "oh, you poor baby."
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