Can buyers afford these high home prices?

Q: With interest rates so low, people are mortgaged to the hilt and house prices are very high. What will happen when people have to sell their houses and buyers, facing higher rates, can’t afford the prices? Sellers will not be able to sell at reduced prices because they will have to cover the mortgages they have taken out.— Cliff, The Netherlands

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A: The scenario you describe is being hotly debated by analysts and economists these days for the reasons you’ve outlined.

It seems clear that mortgage rates can’t go much lower. The question is how long before they start to go back up again.

It’s impossible to say, but it seems likely that rates won’t go up until the economy begins growing more quickly. In theory, that added business activity would create more jobs, or raise the incomes of people who have a job, making it easier for them to afford those higher house prices.

That’s the theory anyway. The debate really seems to come down to income: if incomes keep rising, people can continue to buy more and more housing. So far, that seems to be happening. So, while chainges in housing prices and interest rates are important, changes in income are probably more so.

It’s also not clear why “people have to sell their houses.” Unless they simply can’t pay the mortgage anymore, most people tend to defer selling instead of taking a lower price. That’s one reason housing prices tend to fall less severely than other assets, like stocks. If your house “price” falls but you hang onto it for another 5 years and the price recovers, you haven’t really “lost” anything.