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It's hard to connect interest rates to house prices historically, but I think that's because there's two scenarios going on, with some substitutability, but a general move to the latter over the last 50-30 years due to zoning and planning changes and urbanization. In areas where developable land is very plentiful - rural, deserts, minimal environmental/nimby protections, etc. - land prices will remain low and house prices should be constrained by building costs. In the same way that we don't expect TV or car prices to go up very much with lower interest rates, even though you consume durable goods over 20years, as competition holds the prices to what it costs to make rather than how you benefit from them. Over the long term, it used to be that house prices tracked construction costs pretty well. However in areas where the fixed quantity of land is binding - urban, or areas with stringent protections and managed growth policies - land and house prices will be bid up to what people can afford via monthly payments, and will therefore respond greatly to interest rates (and IR expectations) Further add on that high property taxes in some regions can dilute the costs associated with financing changes (if interest rates increase from 1 to 2%, but you're paying 5% in property taxes, that's only a 7/6% increase in your costs) edit: to summarize, where supply is elastic, interest rate reductions should cause quantity supplied to increase, price to remain the same, and monthly costs to decrease. Where supply is inelastic, the quantity stays the same, monthly payments stay the same, price increase. We've possibly moved into an environment with more supply inelasticity in recent history. |