In order to get a better idea whether or not we have seen a relationship between mortgage interest rates and real estate prices in Manhattan, let's look at the rates of change per year, and plot them against each other. With this plot, we expect to see a large rise in prices when mortgage interest rates drop, and a drop in prices when rates rise.

There's a lot of information on this graph, so let's take a closer look at a single data point. The point in red is for the change over the years 1999-2000. The 30 Mortagage rate rose from 6.8% to 8.2%, or a 1.4% rise, while the average price of a Manhattan apartment rose from $368,000 to $438,000, or a $70,000 rise (in 1982 USD). This places the red point in the upper right quadrant, with positive interest rate growth, and positive real estate price growth.

So, according to our expectation, we should see all the points in the upper left quadrant, where prices are rising and rates are dropping, or in the lower right, where prices are dropping and rates are increasing. This we don't see.

It's interesting to note that only four of the points are in the lower right quadrant. These four points are years where interest rates were rising, and real estate prices were falling. Compare this to the quadrant above, where rising interst rates were concurrent with rising real estate prices. There are eight points in this quadrant, almost twice as many as in the quadrant below. This data shows that rising interest rates do not always correspond with a drop in real estate prices. Just don't tell the Fed...

Well, this graph is great, but I'm a little disappointed. I was hoping to see a real relationship between prices and rates, but I don't see much here. I was hoping the points would fall on or near a line, and this would give me some insight into how the market reacts to interest rate changes, but it's not here. Why don't we dig a little deeper...

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