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Real Estate News: Do Interest Rates Drive Home Prices?


 Q.       “Do Interest Rates Drive Home Prices?”

 A.        This is a common myth.

 Interest rates are only a very small part of the equation, with home-prices primarily driven by other factors.  This is how I think about the market:  The key to housing is that homes are a leveraged asset, meaning that people do not pay the full purchase price of a home out of pocket.  This gives home-owners the ability to “upgrade” homes as home prices increase – creating a self perpetuating cycle.  This is easiest to see in an example:

 Let’s say someone buys a $100k house with 20% down.  This means they have $20k of equity in the home and an $80k mortgage.  If home prices rise by 10%, the homeowner now has a $110k home, with an $80k mortgage, leaving $30k of equity.  At the same 20% down, the home-owner can sell their home and “upgrade” to a $150k house (most homes are purchased with proceeds of a different home sale)!  With mortgage insurance and low down payment requirements, this cycle becomes even more robust.  At 5% down, that same 10% increase in home prices would allow the homeowner to move from their $110k home into a $300k home! As home prices continue to rise, this process is repeated, increasing demand at higher and higher prices.

 This cycle will continue so long as the homeowner can 1) afford the new higher mortgage payment and 2) can get a mortgage.  For this we track the National Association of Realtors Homebuyer Affordability Index (HAI), which tracks whether the median household has enough income to qualify for a mortgage on a median priced home (if it is above 100, the median homebuyer has more than enough income).  Interest rates impact this measure, but so do housing prices, household incomes etc.  The way I like to think about Homebuyer Affordability Index, is that it doesn’t drive the cycle, but it is a good barometer of whether higher costs will stall the cycle. (HAI Index attached).

 So far I’ve talked about how rising home-prices are a self-perpetuating cycle where higher home prices increase the equity people have in their homes, increasing the demand for more homes, driving prices even higher.  The same principal however holds on the way down.  Declining home prices decrease the equity homeowners have, decreasing their ability to buy a home or move, decreasing demand for homes and driving prices even lower. 

 When we think about this principal in aggregate it’s clear that we have a cycle where home price appreciation drives more home price appreciation, until either access to credit, or costs are too high, then the cycle reverses and home prices fall for the same reason.

 The decline in prices is ultimately slowed as people paying down their mortgages, and cash buyers begin to increase demand at the new low price levels… and the cycle repeats.  Interest rates and mortgage rates are only a small piece of the cycle, driving a portion of affordability.

 But there is more:

 On top of the normal housing cycle is a credit cycle.  What this means is that lenders typically are more liberal with their lending when loans are doing well.  So as home prices are rising, you get very few defaults or losses to the mortgage owners as borrowers who are in trouble can simply sell their home at a profit.  This entices lenders to make more loans at even more liberal terms, lower down payment requirements etc. 

 The same principal holds as home prices decline: borrowers can no longer “cash out” of trouble, meaning more mortgages go delinquent and lenders take losses.  Lenders then tighten their lending standards, stop offering home equity lines, demand higher down payments etc.  This credit cycle overlaid on what is a naturally cyclical asset exacerbates cycles making home price swings even greater and lending them even more momentum.

 Today, home affordability is coming down, but remains well above historical averages, home prices have been increasing (hence increasing demand) and lenders are becoming more liberal with their lending standards.  Hence we have a continued rise in home prices.

 This housing theory gives us a lot of other interesting insights, for instance the price of ‘starter homes’ often leads the cycle both on the way up and on the way down.  This is because a change in the price of starter homes drives demand for each market segment higher in the market.  The price of starter homes is driven by both supply of these homes as well as incomes (and savings) of young first time home-buyers, and so the income of 25-35 year olds becomes an important leading indicator of housing (my personal theory is that this is why home prices in San Fran are outperforming the national average). Housing markets are of course very segmented and geographically independent, so while all of this makes sense in aggregate, different regions will be at different stages of the cycle, or being driven by overarching economic drivers that drown out the impact of the housing cycle (i.e. Detroit).

 So, you see, there isn’t, necessarily, a strong link between rising home prices and rising interest rates.  Because so much of the economy is housing dependent, rising home prices can drive economic growth (and falling prices slow it), this can in turn drive an increase in interest rates.  But it is definitely not a direct relationship.  At best it is a casual, not causal relationship.

 Attached is a graph tracking the average 30-year Mortgage Rates versus the Case-Shiller Index

compared with the Home Affordability Index.   

 I don’t see any relationship, do you?

  The Burch-Mudry Team                                                          


 Private Offices at the Hawthorne Inn-Concord





Download the Most Sophisticated Real Estate Search App

Many of you know that your Innkeepers are also active in the Metro-Boston Real Estate Market.

In fact, many guests have become our clients. They have either fallen in love with our area, visiting us on a job-search or visiting the Inn on a Honeymoon and ready to start a new life.


We have a very powerful Search App to offer you. It has Nation-Wide search capabilities.

It is also GPS sensitive, so you can see everything available  in your geographic area, Open Houses too.

Follow the directions in the Link  for directions to Download your Personal Real Estate Search App:

Enter our displayed code to unlock the full capabilities of the app.


The Burch-Mudry Team

Keller Williams Realty Boston Northwest

Gregory Burch: 978-505-2979

Marilyn Mudry : 978-505-0614



Private Offices at the Hawthorne Inn-Concord

462 Lexington Road- Concord-MA



Keller Williams Realty Boston Northwest is in the top 1% of all offices in Massachusetts  and sold more homes than any other office in the Acton, Concord, Sudbury market area in 2013!



Hawthorne Inn Welcomes Red Chair

Red Chair at Old North Bridge 3Red Chair Orchard House 5Red Chair visits the Minute Man statueRed Chair at Old North Bridge of 1775 fame-where was fired the Shot Heard Round the World-Red Chair re-visits Walden PondRed Chair Hillside Burial Ground 5Red Chair overlooks Concord centerRed Chair at  Old Manse- lived in by Hawthorne and EmersonRed Chair Caesar Robbins House 1                 A simple red wooden chair has been elevated to celebrity status, and is being welcomed at Inns and B&Bs as it travels throughout New England. The Red Chair has been sighted in Concord where it was a guest of the Hawthorne Inn. The chair passed several enjoyable days visiting the historic sites of Concord for photo opportunities.

Tower Hill Botanic Garden

Established in 1842, the Worcester County Horticultural Society established Tower Hill Botanic Garden as a 132 acre showcase of ornamental, edible and Native New England plants. The indoor Orangerie and the lofty Limonaia are provided with imports and exotics that provide a year-long riot of color and rich scent. We recently visited for the 183 annual Camellis Show. Tower Hill will host an African Violet show in April 2012 and May will bring a Seven-State Daffodil and Primrose competition.

Spring Flowers at the Inn

Fine-Jewlry Designer Ellie Thompson to Show at Inn.

Preview her works:

Chihuly Glass Exhibit

The Boston Museum of Fine Arts is currently hosting a show of glass-works by Dale Chihuly. Among the colorful installations is the largest collection of his chandeliers ever together for a single show. The works span the intimate to monumental, with dazzling colors both bold and diaphanous. 





Beavers have been active behind the Hawthorne  Inn damming the Mill Brook. We have lost 30-40 feet of land to recent flooding inundating the edge of our lower garden. This new and extensive beaver-pond has displaced a great deal of wildlife while creating new habitat for others. The wood ducks were quick to explore the area. But, at the same time, the coyotes have been flooded from the adjacent low-lying farmland and now range accross our property in the middle of the night when they had not before. These new night-time marauders have caused the red fox to now travel by day, in fear of their lives. A beautiful and healthy fox spends time on the Inn’s front lawn waiting for traffic to clear before crossing over to Hawthorne’s home.

Puppy Has Arrived

Our new German Shepherd puppy has arrived after a flight from Kalamazoo via Chicago. We have received over 150 name suggestions. His chosen name is “Pashka”,


 which is a phonetic spelling of the Slovak for paw. And he has big paws! Sky, the Inn dog, loves her new puppy- now she is leader of a pack-albeit only a two-some.

We look forward to introducing Pashka to you on your next visit to the Inn.

Enjoy our latest Newsletter





Winter-Calm in Concord
Banner Bull
News from the Hawthorne Inn 
Beyond the Winter Solstice January 2011
In This Issue
Afraid of Heights?
Name the Puppy
Relaxed Season
Fairy Tale Inn
Unforgetable Trips

Afraid of Heights?

Then DO NOT Open this video clip. If you can handle watching a dangerous job and a frieghtening climb then click away! Just wait for the cartoon intro to finish and then hold onto your seat.





   We have added a        Kohler Bubble-Jet bathtub to the popular Emerson Room. Enjoy a private gas-log fireplace, warm soak and Four-poster Queen bed after a day of relaxed exploration.




It ‘s Not Too Early
To Start Planning for
Valentine’s Day.







12 Days Old

Help us Name the New Puppy

Our new German Shepherd puppy was born December 23rd at MondouCu kennels. He is the son of Aine and Jaarko. We eagerly expect his arrival to the Inn on March 4th. We need your creative help to find an appropriate name for Sky’s new canine play-mate. The new pup is observed to be “quiet, confident and an active problem solver”. Mix this in with the season, Concord, the Transcendentalists, spiritual values, silliness, dogginess and  inspiration. Email  your name suggestions to:







Relaxed-Season Rates                                                                       

Winter Battle Road
Along the Battle Road

Enjoy Concord this Winter with a visit to the Hawthorne Inn and take advantage of our Relaxed-Season Rates. We will have Special Rates posted throughout the season. Snow is blanketing the woodland cross-country ski and snowshoe trails, Walden Pond is beckoning ice-skaters, Concord Museum, Orchard House, Old Manse and Museum of National Heritage are open and not crowded. This is a fine timefor  PassporttoNewEngland have your Passport stamped and earn a Free-Night stay!





   frog princeA “Fairy-Tale Inn” Review

Over the past 35 years we have had many reviews written about the Inn: professional travel writers (see below), posted on Trip Advisor , and candid observations inscribed in comment books that we have placed in the guest rooms. Sometimes it is a delightful experience to see through someone else’s perceptions. To enjoy the Hawthorne Inn through the eyes of a  13 year old guest, please read her short Fairy-Tale Review.




 Hawthorne Inn on World-wide List of “Unforgetable Trips”

Los AngelesTimes  Travel writer Susan Spano (also the New York Times’ Frugal Traveler) looked back over 10-plus years of writing travel stories for the L.A. Times and chose her top 50 trips, from Sweden’s Arctic Circle to the canyon lands of Utah. Her stay at the Hawthorne Inn and Concord made the list. “Catching fall colors where America began”









2011 marks our 35th Anniversary of welcoming guests to the Hawthorne Inn.
We thank you, one and all, for adding your stories to our lives. Visitors from 113 countries have given us many blessings. We hope that we have provided in return fond memories, good conversation, a brief respite and a refuge that allows the calming voice of eternity to issue forth from within you.

May Peace and Love enfold you all.

Gregory and Marilyn




Hawthorne Inn                          
462 Lexington Road, Concord, Massachusetts 01742

Tel:    978-369-5610









Hawthorne Inn | 462 Lexington Road | Concord | MA | 01742