We did a little bit in the 90s when interest rates increased, and I think the rate increase in the late 2000s was responsible for at least some of the drop in home values, although how much was obscured by the housing bubble, and low interest really acted like a multiplier there.

https://fred.stlouisfed.org/series/CASTHPI

https://fred.stlouisfed.org/series/FEDFUNDS

But you're right in the sense that we haven't seen the drop in home values (or any high capital asset) associated with the increase in interest rates of the 60s through 80s.

That's because interest rates having generally trended down from the mid-teens to zero in the past forty years.

Unless we're willing to go negative, that cycle is coming to an end.

We kinda have gone negative with QE, but yeah, interest rates are likely to come up sooner or later.

Sure, but the point is the buyer only looks at the price as a function of the payment they can afford. If the buyer can afford 2k/month they don't really care which part moves. Rates or price? If that means high rates and lower price? Fine. Low rates and higher price? Fine, but carries more risk as you (and I pointed out).

If you can count on stable employment for the next 20 years, you can make a plan like that. Otherwise your fallback might be to sell the house before it's paid off.

From a HN perspective, this means it's hard to buy a house and do a startup; you'll never accumulate enough savings to reduce the risk.

In the inflation-adjusted past, you had the option to save up $100k or get a $5k/month mortgage; now you have the option to save up $1M or get a $5k/month mortgage. The monthly payment hasn't changed but the space of options and (and their risks) certainly have.

Certainly true. Though higher price with lower rates, assuming monthly payment is the same, can be beneficial as a larger percentage of your payment goes towards principal. That only holds as a positive if price doesn't drop due to interest rate increases.

But I'd definitely rather be buying a house in a high interest rate environment... don't like the tail risk given how low rates are.

It really depends. If you want to pay 100% cash for a home then yes, high interest rates are the best time to buy. But with interest rates currently below market returns, you're maybe best off borrowing 80% and using your remaining cash for a diversified portfolio of liquid investments that will likely outperform your APR long term.

If you view homes as day trading then yeah, there's risk in interest rates. But it's a home - a place to live if it's a primary residence. Ultimately if interest rates go up I don't really care since I don't plan on selling anytime soon. It doesn't change MY monthly payment. And if I did want to sell, well I'm staying in the same market - housing. So prices would drop across the board. So yes, maybe I can't sell my home for much profit or even a loss, but my home isn't the only one affected by this. Because you're in the same market, whatever you trade it for will have suffered a price drop as well.

Likewise if you buy a home while interest rates are high and they fall. Your home will have gone up in value but so will any other home you want to buy. So you're in a similar situation.

So I'm not worried about tail risk here. You do expose yourself to risk, however, if you buy more home than you can afford and we run into rough market conditions which put your income at risk. If you can't cover until things improve then you end up like the many people in 2008/2009 that lost their homes due to being over leveraged (mortgages are leverage, after all). This isn't unique to homes, however. Margin has its risks.

Here's how I see it, and I realize I'm fortunate: If interest rates begin to rise considerably over the next decade, reversing the trend of the last 40 years (!!!) then I'd consider pulling a portion of cash from certain investments to buy a home with cash after selling my current home for whatever p&l I get - if I want a new home. Or I'd just continue to live in my home and not worry about it. After all, I view my home first as a place for my family to live comfortably and then secondly as something I could make a return on one day maybe. But that isn't my primary concern.

If anything, I'd probably stay in my current home and then buy a second home (a vacation home, rental, etc) with cash.

> But I'd definitely rather be buying a house in a high interest rate environment... don't like the tail risk given how low rates are.

Don't forget the tail risks of inflation.

The risk of not buying a house in a low-rate environment is that inflation takes off, the price of the house goes up 10x to match the price of everything, your rent goes up alongside everything else, but the people who bought still have the same payment as before. Interest rates went up to ~18% in 1981, but that still didn't take average prices down from the $47K in 1980 back to the $17K they were in 1970. A real estate bear market is usually 10-20%, not the 3-10x that home prices go up in a high inflation environment.

You seem very knowledgeable on the market trends. What do you think the effects of COVID-19 will have on the market, given unemployment broke records and all that?