Bubble Bubble Toil & Trouble: A Focus On Market Bubbles

Are asset prices too high and markets in a bubble that is ready to burst at any time?

There have been speculative manias for as long as human beings have been allowed to speculate en masse. US Housing, Dot Com, the South East Asian Tigers, Japan, the South Sea Bubble, Dutch Tulip mania… the list stretches on through financial history.

What do all these episodes have in common? People. The objects of speculative mania have changed, the century in which they have taken place has changed, but people haven’t.

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Is The Value Of Your Home Going To Fall As Rates Rise? 6

will higher interest rates reduce the value of your home? Probably not

Let’s conclude our discussion on mortgage rates, house prices and epiphenomena with the Fed’s role in the housing market.

As explained in Parts 3 and 4, higher mortgage rates are primarily a function of a bullish housing market, not Fed hawkishness.

By extension, the Fed doesn’t really have that much control over the US housing market, at least not through the interest rate channel.

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Is The Value Of Your Home Going To Fall As Rates Rise? 5

will higher interest rates reduce the value of your home? Probably not

Mistaking mortgage rates for the real estate market is what is technically termed an epiphenomenon.

The word simply refers to a secondary phenomenon that occurs alongside a primary one.

Since they occur together, people mistakenly attribute a causal relationship to both, even though this often isn’t the case.

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Is The Value Of Your Home Going To Fall As Rates Rise? 4

will higher interest rates reduce the value of your home? Probably not

Now that you have a better understanding of how the interest rate fallacy applies to the housing market, let’s take a look at another often misinterpreted chart.

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Is The Value Of Your Home Going To Fall As Rates Rise? 3

will higher interest rates reduce the value of your home? Probably not

In order to see why this is the case, let’s go back to our example of her selling her home into a bullish market.

In all likelihood, she will also be selling during a period where mortgage rates are high.

Why?

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Is The Value Of Your Home Going To Fall As Rates Rise? 2

will higher interest rates reduce the value of your home? Probably not

Another way to observe that home prices (in the US, and most likely everywhere else) don’t react in the same mechanical way to changes in interest rates as bonds do, is by looking at their correlation.

Bonds and rates have an inverse relationship. This means a correlation of -1. When one variable goes up, the other goes down.

If this were true for houses and rates, we would see a correlation that, at the very least, remains negative most of the time.

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