EP08 - How Falling Rates Broke Housing

How interest rates affect housing prices. Learn about ZIRP (zero interest rate policy), mortgage rates, housing affordability, and the relationship between rates and real estate values.

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20 years of zero spending to buy where I live...

I just want to own a wall that's mine…

I want to go back to the time when property was still affordable…

Seems like we get the chance to go back to the past.

W-Where did you come from? Woaaa—

Year 1979

Wait… I could buy this with just two years of my salary!

This hurts… but at least it'll be mine forever if I keep paying.

Year: 1980-1983

Good news! We can refinance your mortgage at 10% and hand you $42,000—tax-free!

Wait what? I get free money, AND a lower interest rate?!

The catch is you will have a new 30 year old loan to replace the old loan you've paid for the last 3 years.

T-This is fine, right? Money now better than money later.

Yeah, so far. And if you KNOW interest rates are going LOWER, you should TOTALLY use that cash to buy more houses. NFA.

In 1980, houses are still cheap...

For now. Then it got expensive because everyone who wants one gets one.

But how?

If a house were a consumer good, lower interest rates would mean a cheaper house.

But when a house is bidded like an investment vehicle, you don't look at the final price. You look at the monthly payment you can afford now.

That is how lowering interest rates directly raise house prices.

The appraiser didn't go inside. He stood on the lawn and wrote a number.

My net worth increased, but I still owe what I signed for!

So sign for more. Clear the old loan with the new one and keep what's left over.

Now I raised $42K cash. I still live here. I didn't have to sell anything!

You borrowed against a price rise nobody worked for. Now spend that cash to "stimulate" the economy or "hoard more land claims against the future"

1987 · 9%

This is three months of our wages. We were hoping it'd be just enough for the deposit—

I'm getting both units. Cash, today.

And anything else you've got on this street.

Interest rates lowered again. We can rewrite your loan and hand you the difference—

How much this time?

1994 · 7%

We've saved seven years. We only want the one unit, the small one at the back—

I'll take the building.

Keep the model. I'll want the next one too.

Another interest rates cut came through. Against the twelve units, you could pull—

Whatever the number, wire me the cash and I will restart the mortgage all over again.

1998 · 5.5%

We brought all of it this time. Every—

I'll buy the strip, the flats above it, and get me a manager to rent them all out!

Do they ever come back?

Rates have fallen again. On the whole portfolio this time—

Don't tell me the number. Just tell me what it buys.

2005 · 3.8%

We aren't asking for much any more. One of the small ones, at the back—

I will take your entire stock!

My payment went down. Signing it again made my short term debt expense cheaper!

I didn't add a room. I didn't fix a roof. I signed the same house again and it keeps paying me!

Year: 2005

Rent is real. The hotel is real. And I have paid off all of my debt installments with the rental income I harvested from my entire city with cash to spare!

Wait... Why can't anyone else do what I did?

Because YOU were the few people around when rates were 18%, and then watched them fall for 20 years straight!

Every marble countertop, every hotel fountain, every 'passive income' check—

paid for by people who will never be able to buy in.

The kids are locked out forever!

I… I stole their future?

It is not my fault! I just refinanced whenever the banks rang my phone.

You took that cash, then use it to bid against those who haven't start as early as you!

They could have done the same as well anytime they want.

You started at 18%. Now we are at 3%. What happens when interest rates go 0%?

T-The money glitch is over?

And that will be the most expensive your real estate will ever get valued

That is how we accidentally made raising rates a political suicide.

If any politician raise rates, housing goes down with them.

And when housing goes, it drags the rest of the economy behind it because every homeowners are stuck with mortgages more expensive than their house's resale value.

No one wants to vote for lower house prices.

So… they just keep printing.

I borrowed it from the future… from them.

Time to go home.

I-I want to go back… please…

Present - 2025

If we have to do it all over again, maybe we shouldn't have allowed refinancing.

There is still a way to turn this around. We can build more houses on new lands, even if it lowers the current prices for existing owners...