Rising and Falling Rates in Relation to Real Estate Prices

“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