“A 1% decline in real interest rates should lead to a spike in home prices in certain cities in the U.S. ranging from 19% to 33%.” -Bloomberg (Feb. 23, 2022)
However, since real estate is “sticky” meaning due to high transaction costs and most people will hold off selling at a loss, the relationship of increasing rates is not as straightforward.
“The problem (with gauging the effects of rising rates)……. lies in the fact that rising mortgage rates often go hand in hand with rising wages, a stronger economy and inflation — all forces that in different ways help undercut the burden of rising borrowing costs.”
So unless there is a Black Swan or stagflation1 in our horizon, rising rates have slowed real estate prices, but they continue to grow in the long run.
Chart of the Day: Case Schiller Home Price Index (the price of a typical single family home) going back to 1987.
https://pubs.aeaweb.org/doi/pdfplus/10.1257/089533005775196769
1Definition of stagflation
Samuel serves as Senior Vice President, Chief Investment Officer for the Crews family of banks. He manages the individual investment holdings of his clients, including individuals, families, foundations, and institutions throughout the State of Florida. Samuel has been involved in banking since 1996 and has more than 20 years experience working in wealth management.
Investments are not a deposit or other obligation of, or guaranteed by, the bank, are not FDIC insured, not insured by any federal government agency, and are subject to investment risks, including possible loss of principal.
