Source: Iacono Research


Some people look at me funny when I say that Real Estate is one of the few bright spots in the economy, but that its mostly inorganic.

Tim Iacono, who does a masterful job explaining how extraordinary these Fed driven mortgage rates are. The 40 year average is 8.7%, the 20 year average is 6.5%, and current 30 year rates are 3.3%.

The chart above is from a post of his — the change just over the past year or so is a ~15% increase in buying power for mortgage users from $240k to $280k on the same $1100 per month.


How Fed Policy Distorts Home Prices
Iacono Research 12/05/2012

Category: Bailouts, Federal Reserve, Real Estate

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

22 Responses to “How Much Is the Fed Driving Home Prices?”

  1. Pantmaker says:

    Low interest rates are propping up home values. Think about what 7% rates would do to this market. Unfortunately this little trick works both ways.

  2. wally says:

    The chart does not show that people will pay more for the same house; it shows that they can buy a more expensive house, so it does not support the claim that the Fed drives home prices.


    BR: Anyone buying a home by using a mortgage has that much more purchasing power — and for any given home that is for sale, the pool of potential purchasers at that price is larger. These competitive forces — buyers with firepower — tend to drive prices on any specific home higher when buyers have less purchasing power. There’s more to it than this, but thats the simple version.

  3. [...] How much is the Fed holding up housing?  (Big Picture) [...]

  4. Iamthe50percent says:

    I have to agree that the market is good, unless you have a house to sell. But only for first time buyers.

    That 3.3% rate? Only with a ton of points and closing costs, unless from a builder that’s eating them. In practice, think 4%. Still, that’s the lowest they have been in my entire life and I’m 67 years old.

  5. Woof says:

    Nice research, but the word, I think, is ‘principal’.

  6. Stuart Douglas says:

    Two quick thoughts.

    1. I always love when people talk about the “mortgage” being $1100 month for $280K. Did we forget about the insurance/taxes that comes with that? I guess I am asking for the total nut to be represented. Not, just what the amoritization table says.

    2. 40 year mortgage? Really?

  7. maddog2020 says:

    Stuart –

    The plot is the avg of 30 yr mortgages over the last 40 years (and 20 years), not a rate on a 40 year mortgage.(although I recall hearing about 40 or 50 yr mortgages in CA during the height of the bubble – maybe that’s just urban legend.)

  8. wcvarones says:

    It’s not just the mortgage interest rate.

    It’s also the outlook for future inflation due to reckless monetary and fiscal policy. And that outlook is very, very bright.

  9. DeDude says:

    Wasn’t there something about a lot more people getting 15 or 20 year loans rather than the traditional 30 year?

    I think that those who can qualify for a loan to a large extend have been getting shorter mortgages rather than bigger houses. That makes sense if people are scared that housing prices may fall further. When they start seeing solid recovery of 15-20% from the low prices they may change and begin using the lower rates to get bigger houses.

  10. Engineer Mann says:

    Over the last three years, the FHA MIP has increased enough to cancel out all of the affordability gains from lowering rates during the same time period. Right now, it comes out to about .125% of the loan balance per month. So, $275/mo for a $220k loan.

    In 2009, monthly MIP was closer to .04% – costing closer to $90/mo for the same loan.

    At least for folks going the 3.5% down payment route.

    And second mortgages have gotten harder to come by, since they are unsecured. So more people are going the 3.5% down route.

    What the FED gives, the FHA takes away.

  11. DSS10 says:

    The purpose of the FED housing intervention was to stimulate Re-Fi’s and bring some relief to troubled bowers and to stimulate spending by existing non-troubled homeowners by lowering payments and generating additional discretionary income. Reduction in housing inventory was also a driver but that effect was mainly to ensure liquidity.

    But what will happen to housing prices once rates start to rise? Dose anyone remember 1980? And what about the limitation on deductions or reforming the mortgage interest deduction which is under discussion currently? The real-estate market is so pumped up by the government right now that it seems more unreal than 2007. I have not seen any tangible wage growth or rise in household assets (assets only, not household balance sheet which has improved through defaults and reduction of revolving credit) and any sort of wage growth is a long way off.

  12. NoKidding says:

    While incomes for the middle 60 percent stay flat, if rates go up, prices must come down.

    The Fed is trying to save the banks from balance sheet implosion by holding rates down (30-yr mortgage rate correlates to 10-yr treasury yield R2>.9). If they do it right, prices will stay flat until unmanipulated housing value intercepts manipulated housing price. Then prices will continue to stay flat while interest rates are allowed to revert to mean plus whatever the economy looks like when that happens.

    I’d love the opportunity to make a super-leveraged bet that median nominal US house price stays +/-20 percent for the next decade.

  13. robertso2020 says:

    Isn’t it consensus that housing is improving? Also, when did you become a real estate bull?

  14. Robespierre says:

    I’ve always being of the opinion that looking at the mortgage payments to see what you can “afford” is the most tragic joke that the RE/banking industry has played on the public at large. What people seem to forget is that they owe the full amount of the loan so it is not a bargain as you put it. Moreover, this way of thinking inflates housing because “you can afford the mortgage” regardless of principal. Houses will be a bargain when their cost to earnings ratio is around 3 (or 4) to 1. In other words in an area where median earnings are around $60K a house becomes affordable at around $180K to $240K.

  15. Jeff Big says:

    From what i am hearing,the banks are so strict with credit for loans,that they are rejecting most mortgage applications.They have raised the bar so high that people cant get loans.Until that changes,real estate sales will and are suffering.

  16. BuildingCom says:

    Considering housing demand is at 16 year lows and falling, the Fed’s misguided efforts appear to be failing. Worse yet for them, the prices declines resumed in October.

  17. DiggidyDan says:

    Averse to what someone said above, prudence would lead to securing the longest term possible at these rates. . . 40 year mortgage at 4 something percent? yes please. . . These historic lows suggest if you leveraged now in such dire housing market and reality recovers within the next quarter century, you make money on that deal just via inflation and a savings account or CD eventually with the excess funds! Why pay it off now if and when future fiscal policy dictates a higher “safe” rate than you owe?

    Then again history doesn’t always repeat.

  18. foss says:

    I love your site, I really do.

    But on the housing story you are doing that which you seemingly never do – show a confirmation bias.

    Of course lower rates are part fo the story

    or maybe not?

    But even if Mr. McBride’s analysis is wrong (sorry, I’ll bet with him), there is ample evidence that the Fed is not the only game in town pushing down rates. How much is QE to infinity driving down long term rates? How much of it is just the good old fashioned liquidity trap?

    There are plenty of lenders thrilled to make 20-30% down jumbo loans for 3.5% with no points, fora 30 yr fixed. The reason is simple. They need to loan out the money they have and we are at a cyclical flat bottom which is finally rising in housing. These are make good loans. There is no other shoe (barring nightmare armageddon black swan stuff) that is going to drop.

    The Housing market is has been and will always be ‘artificial’ in he U.S.A. FHA, GSE, FED, FNM, PRC, AMT, IRS – pick your three letters – they are all playing with housing and they are all longstanding distortions on a never was never will be free market.

    Either swim upstream or just realize that the river runneth the other way. To be clear, you will be right, but we all are in the very long run.

  19. JimRino says:

    Let’s not forget the Great Recession.
    By this metric, the great recession alone increased “buying power” by 100%, by dropping prices from 2007 by 50%.
    The Great Recession is the driver,
    until the economy recovers.

    This just helps the economy recover.

  20. BuildingCom says:

    “They need to loan out the money they have and we are at a cyclical flat bottom which is finally rising in housing. ”

    Not true. Housing demand is at 16 year lows and falling. Housing prices are still at the grossly levels of 2004.