[Troller]

(12-26-2018 08:16 PM)The Father Wrote:  

(12-26-2018 11:09 AM)Troller Wrote:  

If I want to sell a house and have 15 buyers maybe I will raise the price of the house. They will probably pay more. If there´s no buyer will have to lower the price. Buyers if interest rate goes up can´t buy the house. Because the effort to pay the monthly installment will be bigger. So your price cannot reach you buyer because the rate increase ate the space where your price and the buyer could connect. Everytime there´s a rate increase you are eating a chunk of an asset price.

There's just one problem: Housing prices have gone up when interest rates have risen. And crashed when interest rates have risen. They've gone up when interest rates have declined. And crashed when interest rates have declined. In an academic, all-else-held-constant environment, rising discount rates will decrease asset present values in a predictable manner. The problem is, highly liquid capital markets are not predictable over short periods of time. They have been, historically, very predictable over long periods of time: They go up, and they are mean-reverting.

This is a ridiculous statement. And goes against the most basic common sense. Unless you have another significant event slowing down the inevitable effect of interest rates (vg brexit, taxes, inflation, ratings, etc), if interest rate is raised or lowered of course you will have a slowdown in housing and economy or the opposite. The time it takes for the effect of the raise to be noticed is debatable. In the paper I quote bellow the time estimated to feel the effect of a cut in interest rate is 3 years. Real house prices around the world tend to move in the same direction for about a year after being hit by a disturbance, then exhibit a modest reversal.
A small cut or raise cannot break a market. Other factors can break a market. But interest raises above a certain threshold are decisive in weakening it. For me it´s like a balloon the more you blow into it the more weak it becomes and prone to pop.

Raise interest rates to 20% and will see if the housing and stocks dont go bust in 6 month-1year. The correlation is evident. Other factors might delay it.

https://www.bis.org/publ/work665.pdf

"Most empirical studies assume that short-term interest rates do not influence housevprice growth other than through the domestic cost of borrowing, ie by their influence on long-term interest rates. The findings in this paper suggest that this view might be mistaken: changes in short-term interest rates seem to have a strong and persistent impact on house price growth. Moreover, global, ie US short-term interest rates – not just domestic ones – seem to matter, both in advanced economies and EMEs. We interpret the relative importance of short-term interest rates in driving house prices as indicating an important role for the bank lending channel of monetary policy in determining housing financing conditions, especially outside the United States, where securitisation of home mortgages is less prevalent.
The larger effect of interest rates on house prices we find reflects in part the use in our regressions of a long distributed lag of interest rate changes. For the United
States, our estimates for the period from 1970 to the end of 1999 suggest that a 100 basis-point fall in the nominal short-term rate, accompanied by an equivalent fall in the real short-term rate, generated a 5 percentage point rise in real house prices, relative to baseline, after three years. We find an even larger effect if we include the data through end-2015. For other advanced economies and EMEs, we estimate that a 100 basis-point fall in domestic short-term interest rates, combined with an
equivalent fall in the US real rate, generates an increase in house prices of up to 3½ percentage points, relative to baseline, after three years.
Another reason we find larger interest rate effects is by allowing for inertia in house price movements. We find strong evidence against the random walk
hypothesis: real house prices around the world tend to move in the same direction for about a year after being hit by a disturbance, then exhibit a modest reversal. We
think that this inertia in house prices reflects the large search and transaction costs associated with trading residential real estate and shifting between owner-occupied
and rental housing. These costs are ignored in the user cost model, which predicts a fairly high interest rate sensitivity for house prices.
Our findings also suggest a potentially important role for monetary policy in countering financial instability. While higher short-term interest rates alone cannot significantly dampen the demand for housing, slower house price growth can give supervisors more time to implement measures to strengthen the financial system. At
the same time, the finding that house prices adjust to interest rate changes gradually over time suggests that modest cuts in policy rates are not likely to rapidly fuel house price bubbles."