Are Real Estate Prices Dependent on Mortgage Rates?

Are Real Estate Prices Dependent on Mortgage Rates?
An article by Lucas Finco
Quadlet Consulting, New York, NY
lucas@quadlet.com Published on Wednesday April 12^th, 2006 9:36 am ET
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(New York, NY) A clear relationship between interest rates and the health of real estate markets is assumed by many in the media. For example, here are some articles that reference a connection between interest rates and the real estate market:

Market analysts and financial gurus repeatedly quote that an increase in interest rates will slow the real estate market. I wondered, is this really true? Does the health of the real estate market really depend on the value of interest rates, or a change in interest rates? For instance, lower rates would seem to correspond with higher growth of real estate, but in some situations, such as in 1999, a strong, growing real estate market was matched with rising interest rates. What does the data say?

I decided to use data from a large, closely watched market known as Manhattan. The Manhattan real estate market is an excellent market to study, and has data readily available. I used the data from Corcoran’s annual report which included data going back to 1974. I also used mortgage rate data going back to 1972, which is available from the Federal Home Mortgage Corporation. CPI Inflation data was also obtained, to adjust for inflation of the dollar, from the US Dept. of Labor Bureau of Labor Statistics. In all, I obtatined 30 years of data for the investigation.

Plotted in black is the average sale price of a Manhattan apartment over the last 30 years. Inflation adjusted data is in red. The 30-year mortgage rate is shown in blue. The market crash of the late 80s is clearly visible. Interestingly enough, according to the inflation adjusted data, the market has yet to recover fully from that decline. The decline of real estate prices in Manhattan after 9/11 is also visible in the data.

It is not really clear in this graph if there is a clear relationship between interest rates and prices for real estate in Manhattan. So, let's see if we can make a graph that will give a clearer view of the data.

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