[JoshuaDavid]

> The biggest purchase individuals make is buying a house. Surely you can't argue that paying a 1-4% higher interest rate on a house wouldn't noticed by consumers.

That depends on how house prices are determined.

If houses are priced primarily based on the cost of construction plus the cost of materials, you would expect consumers to notice a significant difference in total cost under high vs low interest rates, since the base price of the house will be the same either way and a higher interest rate will lead to a higher total cost.

If houses are priced by people looking at what the maximum monthly payment they can afford is, and are bid up to whatever that maximum monthly payment is, people will just observe that houses cost "almost more than I can afford" no matter what the interest rate is. Lower interest rates will lead to higher prices (capped at 360 (30 years x 12 months per year) times what people can afford, at 0% interest rates), and higher interest rates will lead to lower prices (down to the floor the principal being the of cost of construction).

I think most housing markets are more like the first scenario than the second, at this time, but it is entirely plausible that this won't always be the case, and some would argue that e.g. the bay area housing market already more closely resembles the second scenario.

Edit: typo

[JamesBarney]

You're right that the real estate and policy situation in San Francisco is so bad the supply is pretty inelastic. But I don't think it's perfectly inelastic. I think if the price of housing went up 10x in San Francisco you'd have more buildings being built.

But luckily for us very little of the U.S. is as screwed up as San Francisco.