Is The Value Of Your Home Going To Fall As Rates Rise? 1
The recent rally in interest rates has seen 30y mortgage rates in the US rise sharply to about 4%.
These levels were last seen in 2019, and have given rise to concern and commentary in some quarters that rising mortgage rates will cause home values to tumble.
Are these claims and concerns valid?
In order to answer that question, we first have to begin with why these folks are making such claims.
Their perspective is based on a nifty comparison – that real estate, specifically homes, are essentially the same as 30 year bonds. As all fixed income folks know, higher rates cause bond prices to fall.
By extension, higher rates mean lower home values; simple and elegant logic.
Unfortunately, it is also way too linear and reductive.
First of all, a parallel can be drawn between homes and 30y bonds. This is simply due to the fact that most American homeowners take out 30y mortgages to make their purchase.
However, this doesn’t mean that the prices of both must have the same relationship to interest rates. This is clearly illustrated in the chart below.
A quick glance at the chart will tell you that changes in 30y mortgage rates are far more volatile than US national home prices.
That is, rates change more frequently, and to a larger degree, probably because mortgage rates are tightly linked to US 30y Treasury Bond rates. Which is to be expected, since the market for 30y USTs is both more liquid and international than US real estate.
In the decade between 1993 – 2003, US national home prices rose steadily, even as 30y mortgage rates experienced some large and volatile swings.
Clearly the relationship between both asset classes isn’t as straightforward as “rates go up, house prices go down”.
This is further supported by the fact that during the Great Financial Crisis (GFC) in ‘08 both home prices and mortgage rates fell together.
If you stop to think about it, this makes perfect sense.
As the housing bubble burst, home prices crashed, leading many people to not want to purchase a new home. The lack of demand for new homes translated into a lack of demand for mortgages, hence lower rates.
If homes were really 30y bonds, the relationship between their prices and mortgage rates would never be un-inverse.
The key here being that demand for homes drives mortgage rates.
Now to the last highlighted region on the chart above, the years leading up to COVID.
Between 2014 and most of 2020, national home prices didn’t really change much (remember that it’s a chart of YoY changes, not index values). This after huge growth rates in the years after the GFC, a trend which ended in 2013.
During this period, the YoY change in 30y mortgage rates was volatile, but for the most part, trending higher. If the “homes are 30y bonds” logic held true, we would have seen a corresponding fall in the YoY change in national house prices.
But we don’t.
As mentioned above, growth rates for home prices were flat.
To be continued…
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