Rates and Prices – An Analysis of the Current Housing Market

When is a good time to buy a house? Does the housing market always go up?

Kara and I are contemplating buying a house in the next few years. It’s a big decisions to say the least.

Do we jump right in? Or do we bide our time until we are certain whatever house we buy is a smart financial decisions?

Not only is the Austin housing market seen unbelievable appreciation over the past few years, but also the macro environment is also perplexing. I’ve read a few articles which discussed how the housing market is the most affordable for single family house buyers ever. Or at least in a really long time – I don’t remember the exact stat.

We’re also in a period where rates have risen at an unprecedented pace. The expected reaction to this would be a fall in housing prices. This hasn’t happened. Apparently, the higher rates have discouraged current homeowners from selling their house. They are strapped by their “golden handcuffs”, which are the ultra-low rates most home buyers locked in if they bought over the past few years. Given the current conditions of high prices and high rates, it’s an unfortunate time to be foraging for a new home.

Eventually something has to give.

A safe assumption is that the Fed wants to return to a position of monetary easing with lower rates. The Fed funds rate is currently 5.33% (ref). When they do so is uncertain. It is contingent on how quickly inflation returns to their target of 2%.

This begs two questions:

1. How long after a rapid increase rates does it take to drive down housing prices?
2. If the current rate increase is succeeded by a decrease, do housing prices continue to fall? If so, at what point does that trend reverse?

The way I would approach an answer to these questions is to compare housing prices to rates historically. We could then look for comparable periods in which rates similarly rose.

The data point we’ll use for housing prices will be the Case-Schiller Housing Index (ref). A good explanation of this index’s can be found on Investopedia. The index measures the change in U.S. single-family homes on a monthly basis. It is seen as a good barometer for housing prices.

For rates, we’ll use the 30-Year Fixed Rate Mortgage average (ref). It measures the average weekly mortgage from applications submitted to Freddie Mac from lenders across the country. Freddie Mac is a government sponsored company which buys mortgages from banks and other loan makers and packages them to investors.

Okay, let’s take a look!

We can see that the main period in which housing prices went down was the 2007 Subprime Mortgage Crisis.

From a cursory look there are two primary comparable periods.

From October ’93 to December ’94, rates rose from 6.8% to 9.1%.

From Dec ’98 to May ’00, rates rose from 6.7% to 8.5%.

These aren’t apples to apples; however, they are the best we can find. Overall, the long-term trend during this period has rates falling from ~11% in the mid-80s to nearly 2.6% at the end of 2020.

I’ll eventually update this blog with more details on those two comparables.

Stay tuned!