Why high mortgage rate is dangerous
If the¬†mortgage rate is high, more people would prefer renting apartments instead of¬†buying a¬†house. That drives rent prices up. The¬†problem is that due to¬†the¬†high inflation, the¬†price of¬†a¬†house also rises.
The¬†price for¬†housing also rises when the¬†mortgage rate is low. Then it is much easier to¬†take 30-year long mortgage and¬†get your own housing instead of¬†paying expensive rent and¬†getting nothing at¬†the¬†end of¬†the¬†rent term. Then more people will buy a¬†house with a¬†mortgage. With higher demand comes higher price. So the¬†price for¬†housing rises.
In¬†some countries, government incentivises taking a¬†mortgage. Military servants usually get lower mortgage rates. In¬†UK if a¬†person above 18 buys his first house for¬†less than 500k$, he pays only half of¬†a¬†house price. In¬†Netherlands, government insures mortgages, meaning, if a¬†person is insolvent to¬†pay for¬†a¬†mortgage, government will buy a¬†house from a¬†bank, and¬†return money from mortgage payments to¬†a¬†person. The¬†government will also give a¬†discounted rent for¬†a¬†person (I will check this information, I can be mistaken). Therefore the¬†prices for¬†a¬†condo in¬†Amsterdam tripled (if i don‚Äôt mistaken). All of¬†these incentives drive prices for¬†housing up.
Real estate market has a¬†huge problem¬†‚Äď it is hard for¬†prices to¬†fall. Not¬†only because of¬†scarcity of¬†land, higher price for¬†materials and¬†labor costs. There are no¬†market mechanisms to¬†make prices fall. In¬†the¬†stock market, it is possible to¬†short stocks¬†‚Äď sell the¬†stock that you don‚Äôt own, and¬†buy it back when price falls, making the¬†profit in¬†the¬†difference. Short selling works with stocks, because the¬†stocks of¬†one company are identical, their value is always the¬†same.
It is not¬†possible to¬†find 2 exactly the¬†same houses, even Soviet flats have different views, neighbors, and¬†house condition. Therefore, short is not¬†really possible.
To¬†lower the¬†housing price, either the¬†place should loose the¬†attractiveness or¬†the¬†new technologies should make housing cheaper. That what happens in¬†the¬†US market. New housing for¬†the¬†mid-class household became simplier and¬†smaller than before. Remember the¬†housing in¬†Manhattan and¬†Brooklyn of¬†20th century¬†‚Äď the¬†red brick houses with fire stairways on¬†the¬†fa√ßade. Compare their quality and¬†design with new housing: the¬†cheap coloured ventilated panels with studio apartments.
How 9/11 affected housing prices
The¬†example of¬†attractiveness loss was on¬†9/11. Based on¬†the¬†Federal Reserve Bank of¬†New York, most of¬†the¬†employees who worked nearby moved to¬†other parts of¬†New York City or¬†New Jersey. The¬†rent prices for¬†an¬†office in¬†Manhattan dropped from 52.5$ to¬†50.75$ per¬†square foot. By¬†November 2001, 57 million square feet near Trade Center were traded on¬†market just for¬†41.81$ (Pearson, Macroeconomics, page 54). but¬†that happened with offices. What about the¬†households?
More people started to¬†buy one-family houses near New York. The¬†prices went up 10-15% comparing with previous year. Even thought, the¬†average price of¬†one-family house in¬†the¬†US has fallen.
After looking at¬†the¬†graph, we see that there was only one fall of¬†housing in¬†the¬†Mortgage crisis of¬†2008-2009. The¬†crisis basically happened, because banks gave too much mortgages to¬†people, who had a¬†huge risk to¬†become insolvent.
Thousands of¬†people couldn‚Äôt pay off the¬†debts. Their houses were put for¬†a¬†sale. The¬†supply of¬†houses was so high, that the¬†prices went down. Construction companies stopped building houses, just because there were not¬†too much people who could afford houses and¬†not¬†so much banks would give mortgages. For¬†construction companies it is very bad¬†‚Äď they should sell nearly 70% of¬†housing as¬†fast as¬†possible to¬†pay off the¬†debts. Therefore, a¬†lot of¬†companies became bankrupt and¬†ceased the¬†construction of¬†objects.
Such situation lasts till the¬†supply is covered by¬†demand. Meaning that prices fall to¬†a¬†fair price. When it is happened, the¬†construction continues.