Don’t Count on Higher Mortgage Rates to Stall the Housing Market!

Hi everybody, Joe Hillner with Your Home Sold Guaranteed Realty, where we will sell your home for just a 1% commission, guaranteed! 

Ok, so every week, I share market data to keep you informed with the local real estate market.  
Here is this week’s Boca Market Watch.

First, Single Family Homes:

54 new listings, pretty decent, and ranging in price from $360K to $16M.  
16 homes back on the market, while 10 homes listed took a price decrease, and 12 sellers raised their asking price.  And  another poor week with 33 different properties under contract, and 28 going pending.  Only 16 homes were unsuccessful in selling and were taken off the market or the listing expired outright.  And a poor week for sales with just 35 homes closed in the past week,  ranging from $349K to $9.1M!

Next up, Condos and Townhomes:

44 new listings, not great, and ranging from $103 Grand to $5 Million.  
13 units came back on the market, 14 properties with a price decrease, and 3 sellers with an increase.  And a good week with 52 different properties under contract, and another 55 going pending,  And just 13 condos or townhomes were unsuccessful in selling and were taken off the market or the listing expired. 61 closed sales this week, so so, and ranging in price from $100 Grand to $3.95 Million!

Here's what's making news right now.

Real estate prices can be slow to respond to changes in borrowing costs — if they respond at all. Some economists who have documented this history call it “inertia.”   

With the assumption that the Federal Reserve is on the cusp of again raising interest rates, we're hearing a wide range of predictions concerning what this will mean for the white hot housing market, which just registered record-high increases for 2021. 

What's not clear, is whether increasing rates will sabotage the real estate market by raising the expense of borrowing. By all accounts, they should. The higher the rate, the greater the  monthly payment - and the less potential homebuyers can afford. Housing sales consequently decline.

There’s a seductive appeal to this argument. On account of the connection between loan costs and home costs, unraveling the numerous factors in play should provide us the opportunity to stop and think about anticipating the future course of the real estate market.

Consider, for instance, the approach of the Fed's monetary policy in 2008, when house costs went through the rooftop prior to crashing.  the Fed cut rates directly following the tech stock bust in 2000 and the 9/11 assaults, from a high of around 6.6% in 2000 to a low of 2% by 2003. Mortgage rates followed, and everybody packed into the real estate market - or so the hypothesis goes.

But, as Robert Shiller has brought up, this doesn't exactly portray what actually occurred. As he later noticed, "he housing market boom was three times as long as the period of low interest rates." truth be told, it apparently started as soon as 1997, and, as Shiller takes note of, the housing boom was accelerating when the Fed was increasing interest rates in 1999” .

But housing isn’t like other assets; it’s burdened with considerable transaction costs. That means that prices can be quite slow to respond to changes in interest rates — if they respond at all. They’re “sticky,” 

Proof for this comes from a new report by the Bank for International Settlements that looked at historical data on the connection between home costs and nominal short-term rates. It found that a 1% decline in nominal short-term rates led to a 5% increase in housing prices.

In any case, it required three years for that to occur. "The empirical relationship between changes in interest rates and real house prices,” might therefore not be as straightforward as implied by simple models.”

All in all, it takes time - quite a while, even - for these changes to turn up in housing costs. the BIS researchers found that adjustments in real short-term rates can continue to reverberate for an entire five years.

Delayed effects aside, there's the problem of expectations. Evidence exists that when the Fed delivers a "shock" when it raises or brings down rates, it will outsizedly affect housing costs. In any case, assuming everybody anticipates that it should bring rates steadily up in a specific fashion and then it does precisely that , there may not be as much of an impact on housing prices.

Alright, you may say. Disregard short-term rates. What about rates for 30-year mortgages? They're climbing at present and that straightforwardly influences borrowing. Definitely that means sickness at housing costs, yes?

Some studies find a connection; others, such as one that subjected the phenomena to a battery of statistical scrutiny, presumed that “there is virtually no short-run influence from mortgage rates to housing prices.”

The issue, lies in the way that increasing mortgage rates frequently go connected at the hip with rising wages, a more grounded economy and inflation - all powers that in various ways assist with undermining the weight of rising borrowing costs.

Absolutely no part of this is to propose that a spike in short-term or long term rates is great news for home prices. It's not. but given the time it will take for the full effects to be felt, quit worrying about the many puzzling powers at work, it's very conceivable that the housing market might shock us once again, and just keep going up.