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Benjamin Keller's avatar

The lack of empiricism in the housing discourse lends itself to these sorts of logical errors. Micro phenomena like project level returns do a poor job explaining aggregate variables, but housing is stuffed full of micro analysis claiming to be macro

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John Saunders's avatar

I like this. If interest rates were all that constrains builders and building, some financial guru could work up a multiplier for costs of materials, land, labor and loans that would match the actuals in a locale, and then the effect on demand in that locale. Is anyone doing that?

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Kevin Erdmann's avatar

I'm not sure what you're asking. Can you clarify your comment?

I would argue that interest rates just don't affect cost of capital that much, and that one thing that leads to higher interest rates is a switch among savers to more risk tolerance. If that was the case, for instance, you might find some builders complaining that high rates were preventing them from starting projects while others were announcing that they were selling shares in order to fund increased investment in new inventory.

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John Saunders's avatar

I'm coming around to your point of view on this. :-)

I'm suggesting that some financial math wizard should be able to show numerically a relationship between interest rates and the financial factors, like those I listed, in housing development.

I'm not that wizard. I'm not well read on the subject, but I'd think if there was such a method of showing the relationship it would be widely known. Doesn't seem to be.

Instead we have popular notions based on pop culture macro economic opinions.

You are reasoning from your graphs, which I need to review again, and perhaps personal communications with builders.

I suppose there are industry publications where we might find that someone is actually asking builders about the effects of cost of money on their project prospects. That would be a short cut, bypassing the wizards! And reinforcement of your profile of builders either not starting projects or others securing capital market funding instead of bank loans.

Using your current article's suppy and demand curves, cost of land, and restricted supply, can offset even high latent demand. This is another idea that I'm coming around on, slowly, :-)

Thanks for your response.

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Kevin Erdmann's avatar

Ah, I see. That's what I can't figure out. There are several layers of issues here. I think changes in interest rates do have noticeable short-term effects - shifting home shoppers from a November contract to a September contract, etc. And, I think one thing that happens is that builders clearly see those trends, so it is very hard to disabuse them of the importance of rates in sales trends. But, I would argue that those effects wash out in any meaningful timeline.

So, you've got the homebuilder executive version of this where every builder earnings call includes a comment about how this quarter's numbers came in at "x" "in spite of recent mortgage rate trends".

But, then I'll see more analytical claims along the lines of "after mortgage rates rose by another point, bank "y" lowered their forecast of home prices and housing starts by 'a%' and 'b%'". And, I always wonder how they get their models to spit out that number. Did they backtest those models? How? Because I sure can't find a dependable relationship. And, especially if they follow the convention of ignoring the effect that the mortgage crackdown had on housing after 2008, when interest rates declined sharply and stayed low. How in the world could any backtested model tell them that interest rates are a dependable and important input variable? I confess I don't know the answer.

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John Saunders's avatar

Yes. To the last point, buyer loans aren't available at any rate/price for those who can't even start to qualify. Those buyers are forced to stay put or become renters. The consequences of that are probably more complicated than they look, and they look complicated to me, in terms of who can even sell to buy, get a buyer for what they have to sell, etc..

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