When it comes to housing, most people are "payment buyers." How much they can spend on a house is dictated by how large a monthly payment they can afford. With a 30-year mortgage, interest rates have a huge impact on the monthly payment, since in the first years you are basically covering the interest plus a tiny slice of principal.
Assuming that your housing budget is a fixed fraction of your income, and assuming your income is basically stable, then as interest rates drop, you can afford to pay more for a house. Assuming that you are competing against other people in the same circumstance in an auction market, lower interest rates will tend to push up prices, while higher interest rates will depress them.
Part of the author's point seems to be that this is even more true in areas that are housing-constrained, like the Bay Area, where people push their purchasing power to the limit to buy a house that still doesn't meet their needs (space, schools, commute). As people devote more and more of their income, as a percentage, to housing, they are effectively doubling down on real estate as an investment.
Interesting exercise: assume all new house buyers are "payment buyers", and calculate the impact on house prices of mortgage rates moving from 3% to 4%.
From my calculations, you get a drop of 10% in house prices.
But... is this a 10% drop across the board? I suspect it will impact the higher-priced market segment especially.
My logic: Higher interest rates -> Fewer people can afford the more expensive houses -> More competition for (interest in) lower-priced homes -> Lower-priced homes might actually see a price increase (bidding wars, etc.) while higher-end segment suffers from lack of interest/smaller pool of buyers.
We bought a smaller and cheaper house than we could afford based on that logic… :-)
The Jumbo loan cap will also wierdly effect this scenario. 417k to 625k depending on median county home price. You can sometimes see prices tightly grouped around the limit, plus or minus down payment percentages. Then you are also talking about weird buyer preferences for buyers with lots of cash, who can pay down the lending amount to the cap, or sellers that will split assets so that each sale is below the cap.
Lots of strange market things happen around those caps.
And at ~5 million home sales/year, and an average home price of $240,000, a 10% drop in prices would be about $110B. That's deflation noticeable at the GDP level. My first mortgage (2001) was 7.25%.
If by 'author', you mean the author of the posted article, I agree completely. The parent poster I was responding to stated 'people are spending more money on luxuries (such as their houses)'... which I think gets the causation backward from what you describe. I'd wager that most payment buyers aren't lacking for other things to spend on.
Assuming that your housing budget is a fixed fraction of your income, and assuming your income is basically stable, then as interest rates drop, you can afford to pay more for a house. Assuming that you are competing against other people in the same circumstance in an auction market, lower interest rates will tend to push up prices, while higher interest rates will depress them.
Part of the author's point seems to be that this is even more true in areas that are housing-constrained, like the Bay Area, where people push their purchasing power to the limit to buy a house that still doesn't meet their needs (space, schools, commute). As people devote more and more of their income, as a percentage, to housing, they are effectively doubling down on real estate as an investment.