The home pricing equilibrium

January 15, 2007 | Uncategorized

You’ll save a lot of time interpreting typical news stories if you’re aware of the pricing equilibrium.

 

Balancing_act_2

Looks risky but actually in balance

 

Pricing equilibrium

 

In a normal home ownership market, household monthly payments are in equilibrium. 

 

The reasons are straightforward.

 

Straight_ahead

Don’t be confused by the possibilities

 

Generally speaking, people buy as much house as they can afford.  What they can afford is in turn constrained by two things: down payment (called ‘deposit’ in the UK), and monthly loan debt service.  Of these, it’s the monthly payment that usually controls, because most people who need it can scrape up a down payment (through family, friends, and others).  Unsympathetic lenders size loans by starting with monthly payments — the loan they approve is only as big as the payment you can muster to repay it.

 

Zero credit

No problem … as long as you prove you can pay it back.

 

What does this mean for home ownership generally?  Because markets move fast, changes in interest rates are reflected in market prices almost immediately.

 

Pricing equilibrium

 

·         If national interest rates suddenly go up, prices go down, because average payments stay the same. 

·         If rates suddenly fall, prices rise to compensate.

 

This applies only to macro interest rates; changes in borrower circumstances, or customized regional or local programs, have very different effect.

 

Up_and_down

When interest rates go one way, prices go the other.

 

Pricing equilibrium is incredibly useful in conventional markets but creates ongoing challenges when seeking to create sustainable affordable housing.

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