Relationship: Prices and Rates
Hat tip to Booty Juice for supplying more evidence on the impact of mortgage rates on home prices.
At first glance, this is one of those things that makes perfect sense: The same mortgage payment translates to a larger loan value when rates are low. But how does this hold up under statistical scrutiny?
The answer shocked me: They don’t. In fact, history shows the exact opposite is true.
Home prices tend to go up with interest rates:
How Is This Possible? There are two things I can think of to explain what we’re seeing. Either interest rates don’t matter as much as other factors in determining housing prices and the correlation is merely coincidence; or, higher rates harbor, or are harbored in, conditions that favor housing.
The first case isn’t too difficult to imagine. There are many factors that can affect housing: personal income, general economic conditions, supply vs. demand, family formation, population growth, technological innovations like the automobile that enabled suburbia, and so forth. Interest rate consequences can easily be lost in the mix. Maybe, if all other factors were held constant, we’d see a negative relationship to validate conventional wisdom.
The second case is more difficult to explain. Can high rates actually benefit housing prices? High interest rates provide incentive to save. More savings mean healthier consumer balance sheets, better credit and more equity to put down on a home. So higher rates should influence the relative mix between debt and equity capital, but it doesn’t necessarily influence total asset prices.
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JtR: The 1998-2007 mega-boom was fueled by several additional factors besides improving rates – more favorable taxation that encouraged flippers, exotic neg-am terms with fog-a-mirror qualifying, and 100% financing.