How Low Rates Repriced Housing
An Explanation of How Interest Rates Can Change the World I spent a few years in real estate in the 1980s and early 1990s. Back then, when I qualified buyers, mortgage rates were commonly 8–12%. Lenders looked at income versus the full house payment (principal, interest, taxes, insurance) and told the buyer how much monthly payment they could handle. From that payment we worked backward to the house price. Example: a buyer who could afford $550 a month at 10% interest on a 30-year loan could finance roughly $62,000–$63,000. That was the market. Years later rates fell sharply. The same $550 payment at very low rates could support a loan well over $150,000. Buyers could (and did) bid prices higher because the monthly payment still felt manageable. Home values rose to match the new, larger borrowing capacity. From the lender’s perspective the change was even clearer. When rates dropped to extremely low levels, a 30-year mortgage paying only 1.5–3% was no longer an attractive asset to hold...
