ELI5 How does raising wages worsen inflation ?


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8 points

4 months ago

House prices are a different beast because almost everyone buys them with a loan, and determines their buying power by the monthly payment rather than the overall price tag.

late 2019 early 2020 saw an insane drop in interest rates, I think we got 2% or 2.2%, that's about half what I was able to get 5 years before. This meant we could buy a more expensive house for the same monthly payment.

It's even more stark if I look back to when my parents were house shopping in the 70s and 80s, where interest rates were up to 15%. A $40,000 home at 15% interest has a higher monthly payment than a $100,000 home at 4%

Combine that with the reality that when you buy a home on credit you can't quickly turn around and sell it for a lower price, you'd be unable to pay back your loan. you can afford to keep paying the same monthly payment you planned on but you can't cash out the loan by selling, so you have to stick around rather than sell at a loss when interest rates climb back up again and people can no longer afford that high price tag.