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I live in California since 2000 and the prices of houses have forever made me felt like it's just beyond my reach to wildly ridiculous. But everybody and their dog has always been adamant that buying a house is the right thing to do because the interests rates are so low. I surmise that, by now, this is just a phrase that's been first pronounced by real estate agents and since parroted by every home buyer to justify their purchase or assuage their remorse.

I have a Honda Civic for sale. It's a 2001. You should buy it. Sure, I'm asking two million dollars for it and you'll have to take out a loan to buy it but, hey, the interests you will pay on that loan will be very low so now is the time to buy!

Why will the Honda Civic scenario be considered illogical but not the home buying scenario?

  • Note that these effects are actually intertwined. Low interest rates make the supply of mortgage money go up, which unbalances the equilibrium. Very soon the supply of houses to buy with that money can't keep up with the artificially high demand for houses. Raising the price of the houses moves everything in the opposite direction. – Ben Voigt Sep 23 '18 at 15:25
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    @BenVoigt - see The Intent and Purpose of Comments – JoeTaxpayer Sep 23 '18 at 15:44
  • @Joe I made no attempt to answer the question. I only explained that the two features of the situation OP asked about aren't independent, one caused the other. – Ben Voigt Sep 23 '18 at 19:48
  • I would buy property when interest rates are at their highest rather than lowest. – Victor Sep 24 '18 at 6:01
  • I don't care about interest rates, only cash purchase price and long term prospects for the property. Never buy investment property on borrowed money. If things go bad, you sell the property at a loss, and still have to pay the mortgage. – pojo-guy Sep 25 '18 at 3:14
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When rates are low, real estate agents will push sales with this tactic. They would claim that if you wait too long and rates rise, you'll be less able to afford the house. As you can see, a jump from 4.25% to 5.25% will make the same 30 year mortgage you can afford drop by just over 10%. (Or, if you want to look at the same $$ mortgage, the payment rises 10% or so.)

The fallacy here is that house prices tend to rise as a function of interest rates, nearly all of the housing boom from the late 80's through early 2000's correlated to the rates dropping.

If rates took that jump, a full percent, home prices would drop a bit. Maybe not the full amount to offset the higher rate, but enough that you won't be killed financially by waiting to buy.

If you happen to buy in a time when the business cycle is peaking, and rates are at a relative high, a refinance can get you a lower rate. I bought a home when I got married and the 30 year rate was 7.625%. 4 refinances later, I am paying it off at 3.5%, with payments that are just over half what they were when we started.

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You have two different questions here. Regarding the second question: the problem with the Honda Civic scenario is simply that if you buy it for $2M today, you can't sell it for $2M tomorrow. With the house, you might be able to sell it tomorrow for what you paid today, and if not, you could at least get close. Furthermore, in 5-10 years you could possibly get even more for the house, whereas with the car you definitely could not. The error with the comparison is that the house has multiple potential buyers willing to pay $2M, and the car does not.

Regarding the main question of why low interest rates means you should buy today: it's because you get more value for your money when interest rates are low. That doesn't perfectly translate to "you should buy now", but if you are planning on buying in the near future, then "now" could be a better time compared to waiting until after rates go up.

On a related side note, low interest rates do mean you should consider refinancing higher interest rate debt, as long as the fee for doing so doesn't offset the benefit.

  • If he could sell you his car for $2M, who's to say you couldn't sell it to someone else the same way? – user253751 Sep 26 '18 at 5:28
  • @not_a_comcast_employee because no one could possibly be as stupid as I am. :) – TTT Sep 26 '18 at 7:47
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    Don't forget the tulip bulb futures fiasco in Holland. Hype can drive a lot of people to do a lot of really stupid things with their money. Plus, there are cars that sell for $2 million that were nothing but common cars back in the day. Not disagreeing - you're right cause the world knows a civic is just a plain old car but they probably dont know the math that assigns property value to neighborhoods and individual homes. – Kai Qing Sep 27 '18 at 0:23
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There is a nugget of truth in the advice to buy now while interest rates are low, but it has to be taken in context, and weighed against local conditions. There is a significant difference between buying a house and buying a used Honda. A car will never appreciate in value if it is being used, and will rarely appreciate, even if you carefully mothball it for decades. Houses and land on the other hand do appreciate in value during many periods.

There is something in the advice to "buy land, they're not making any more of it". That is, in the long term, growing populations and economies will force up land and housing prices. The trouble is that the cliche is only mostly true. Over the last 75 years house and land prices in San Francisco have been climbing steadily, with only brief (2-5 year) periods of decline. On the other hand, land in some neighborhoods of Detroit currently has zero or even negative value. That means, at least for now, it's a total loss of whatever you paid for it. If you buy land, you are making a bet on the future of the local economy.

So, if you think the local economy is going to grow, then the value of land is likely to appreciate, and it may be a sound investment. Obviously, buying land with a low interest loan is significantly cheaper than buying with a high interest loan. In the early 80s US mortgage rates were as high as 18%. Very few working folks could generate the cash flow needed to stay current with an interest rate like that. That brings up another caveat: there is no point in making an investment if you can't meet the terms of the investment.

Interest rates may be a bargain now, but land and house prices may be at the peak of a bubble. If your mortgage payment is so high that there is a substantial risk of defaulting, then it makes no sense to take the mortgage, no matter how low the interest rate.

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Low interest have two effects, making it look good to buy a house.

A house is usually a very stable investment, yes a bad job market and people moving to other district may hurt his value but still you mostly increase your value without lot of risk. You also gain a bit monthly income through rents, or the "rent" you pay to yourself. With low interest, the safe investment on a bank account will lose you money through inflation.

Since you mostly buy a house with a huge credit, which has low interest too it makes the investment even better.

Your Honda Civic is losing its value quite fast, through repairs and general loss of value. Maybe you gain a bit of money back, through reducing your transportation cost but a car is often not the cheapest but a comfortable way to move (that's why people like to pay money for it).

  • @PeterK - as we were taught in HS, "loose rhymes with moose".... – JoeTaxpayer Sep 23 '18 at 15:43
  • @JoeTaxpayer 😜 Sorry, one of my pet peeves is loose vs lose. I guess I should just mosey on out of here... 🚶🏽‍♀️ – Peter K. Sep 23 '18 at 15:46
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    Me too! You beat me to it with the edit! Keep it up. – JoeTaxpayer Sep 23 '18 at 15:47
  • I am not sure how to thanks this edits, my english isn't perfect and sometimes i am loosy with it - but through every correcting edits i learn a tiny bit. Thx also goes to Bob who is very active with it. – chris Sep 23 '18 at 15:53
  • @chris - I (and others) have edited some of your posts and I hoped that you might be reading and benefiting from them. I'm glad to see (ummm read) that you are learning from them. Now I'm going to 'moosey' out of here before Peter K edits this comment. ;->) – Bob Baerker Sep 23 '18 at 16:03
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What you have here is first of all a problem of supply and demand.

Honda keeps on making new Civics, so that anyone who wants one, and has $20K or so to spare (or can qualify for a loan for that much) can buy one, plus there are many used ones available for less. Plentiful supply equals low price. Nobody is going to buy your $2 million Civic, even if they can get a 0% interest rate loan for it.

With houses, especially in the more populated areas of California, the situation is reversed. They aren't making more land in California (or water &c), yet people - including you, apparently - want to live in those areas. Supply in the popular areas* is far less than demand, so prices increase.

The second factor is how much you're paying to live. The interest rate affects your monthly mortgage payment. A 30 year mortgage on a $1 million house at 3.5% is $4490/month. At 7%, it's $6653/month. If you happen to be paying around $3750/month for an apartment (SF average in August '18), then the rent vs buy decision is a lot simpler with low interest rates. You would be paying a small extra premium against the expectation that the asset you're buying will increase in value.

*Though if you'd like to live in say Alturas, the median house price is quite a bit lower: $97,500 vs $1,349,400 in San Francisco, per Google.

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