Sunday, June 20, 2021

Interest Rates and Home Prices

 A couple of quick thoughts on recent home price appreciation.

In graph 1, I estimate a national median gross rent/price yield from Zillow rent and price data.  I compare it to the 30 year TIPS (real) interest rate (plus 8%).  Certainly a case can be made that some of the recent price movement has been related to declining real long term yields.  However, without more historical data, this doesn't tell us much.  Two measures both moved in a certain direction over a period of time, and so it's easy to match them up on the y-axis.

Here is a longer series with similar measures.  Here, I estimate the national average gross rent/price level with total rent/total residential real estate value for owned homes.  I also used the CPI rent inflation measure with the Case-Shiller national home price index, with a scaling constant as a second version of the estimate.  Both estimates of rent/price yields follow similar trends.

Here, I use a 30 year TIPS bond issued in 1998 and then in more recent years the general estimate for 30 year TIPS yields.  Here I only added a 3% spread to the TIPS yields.  Part of the difference is that the mean yield is lower than the median yield. (Price/rent is not the same across the market.  It is systematically higher where rents and prices are higher.)  Part of the difference is that we imposed a one-time shock on housing during the financial crisis, adding a 2-3% spread on housing yields compared to other assets, so the spread in the first graph from 2014 onward is much higher than it had been before.

https://fred.stlouisfed.org/graph/?g=ESSe

When I first started looking at these things years ago, I excused the pre-2006 price increases with this relationship.  I still more or less stand by that.  It isn't controversial to say that home prices are related to interest rates. In fact, I think it helps clarify the analysis to show that it is specifically real long-term rates that seem to correlate with housing yields.  But, even in 2005, that doesn't tell the whole story.  Rent/price yields are not uniform across cities.  They decrease systematically where rents are high.  Some of that might be attributed to expectations of future rent increases.  Some of it might be attributed to lower cost of ownership where rent is a product of location rather than structures and services.  In any event, before 2000, gross housing yields had been between 6-7% for some time, and after 2000 they continued to be in that range in most cities.  In some cities like LA or NYC, they declined to more like 3-4%.  The aggregate yield around 5% was an average of a country increasingly becoming bifurcated into at least two different stories.

So, it may be that the correlation between 30 year TIPS and housing yields from 1998 to 2008 overstates the relationship.  In most places the gross housing yield didn't decline as much as the 30 year real rate.  Yet, even if one assumes that a 2% spread remains in place between long term real rates and housing yields, the recent drop in real interest rates is enough to support recent home price increases, even if the relationship is slight.

Actually, I think the causality may go both ways a bit.  In other work, I have mentioned that housing used to be cyclical in terms of quantity and now, because we have obstructed construction so much, it is cyclical in terms of price.  It is hard not to notice a similar regime shift in interest rates.  Before 2000, real interest rates were relatively stable, and changes in interest rates were largely related to inflation expectations.  Since 2000, real long term interest rates have become strangely volatile.

In the mid-20th century, housing yields remained stable because when rents increased, a lot of new homes were built until rents declined again.  All those new units required capital.  Mortgages, construction loans, home equity.  An increase in demand for investment (in generally safe assets and securities) drove GDP growth higher and put upward pressure on interest rates.

There is a lot of concern about a lack of safe assets, which is driving down interest rates.  Homes in California used to be safe assets.  They aren't any more.  They are risky investments in a cartel.  Mortgages used to be safe assets for investment, but many aren't legal any more, so the trillions of dollars worth of new homes they would have funded, which also would have been safe assets in Texas, Nebraska, and Tennessee, also don't exist.

So, there is an interesting set of interacting variables here.  If inflation rises, I don't think that will have much effect on real home prices or construction activity.  If real rates rise, which will be associated with real economic growth (and probably with a mitigation of short-run inflation), then it should have a moderating influence on home prices.  But, unless mortgages can flow, multi-unit projects can be easily approved, and construction can run hot, then rents will continue to rise and long-term real interest rates will continue to be limited.  In that case, it seems like a "hot" market is likely to remain, with housing growth (but at historically low construction rates) and high prices (low housing yields), while the "have nots" who are under the "tyranny sincerely exercised for the good of its victims" will face rising rents.

I suspect that a construction boom would both lower rents and raise real long-term interest rates.  But, the boom must come first.  In the meantime, housing is in a peculiar space, where we should expect there to be some sensitivity to rising rates if the economy continues to recover, yet also housing yields continue to retain at least a 2% spread to long-term 30 year rates, compared to pre-crisis norms, so that nobody should expect home prices to revert to earlier relative levels (especially as rents continue to rise).

11 comments:

  1. Nice to see a blog. So many interesting observations.

    "Since 2000, real long term interest rates have become strangely volatile."

    It is often said that inflation makes long-term planning difficult, and that is another sin of inflation. But we've had modest inflation since 2000 and we see unpredictable real long-term interest rates. My guess is this has something to do with a chronic capital glut.

    "Homes in California used to be safe assets. They aren't any more. They are risky investments in a cartel."

    Unless I misunderstand the meaning of this sentence, I think I disagree. Property zoning in California is stronger than a cartel since it is agreed upon by hundreds of different districts, and reflects the interests of very powerful groups both politically and economically. My guess is OPEC (the strongest cartel in history?) will eventually break apart but property zoning will endure the ages.

    Much more in this blogpost to discuss, but I don't want to overstay my welcome.

    ReplyDelete
    Replies
    1. "Unless I misunderstand the meaning of this sentence, I think I disagree."

      Good point. You could be right.

      Delete
    2. Hello! I’m very excited to inform everyone that I’m completely cured from HSV1&2. I have used Oregano oil, Coconut oil, Acyclovir, Valacyclovir, Famciclovir, and some other products and it really help during my outbreaks but I totally got cured from HSV1&2 with a strong and active herbal medicine i ordered from a herbalist and it completely fought the virus from my nervous system and I tested Negative after 14 days of using the herbal medicine. I’m here to let y’all know that herpes1&2 virus has a complete cure, I got rid of mine using Dr Osato herbal medicine. Contact him via email: osatoherbalcure@gmail.com or WhatsApp him at +2347051705853 to get yours and be cured from HSV1&2, HPV, HIV, HERPES completely. His website is osatoherbalcure.wordpress.com

      Delete
  2. My health was horrible before I decided to try the Protocol Of taking Dr. Ebhota pure herbal mixture. I felt there was no hope for my health and I was to try the Protocol, thinking it wouldn’t work because I have visited so many hospital but same result. However, I was convinced by a Instagram friend to try the herbal medicine because I wanted to get rid of Herpes virus. The herbal mixture that was given to me was really quick and easy to take, within 2 week I was fully cured from Herpes. The herbal medicine really work and I will like to share this great doctor contact with you all email him drebhotasolution@gmail.com WhatsApp +2348089535482 you won't regret it, I promise. ,,//https://www.facebook.com/Dr-Ebhota-109469041179986/

    ReplyDelete
  3. Hello! I’m very excited to inform everyone that I’m completely cured from HSV1&2. I have used Oregano oil, Coconut oil, Acyclovir, Valacyclovir, Famciclovir, and some other products and it really help during my outbreaks but I totally got cured from HSV1&2 with a strong and active herbal medicine i ordered from a herbalist and it completely fought the virus from my nervous system and I tested Negative after 14 days of using the herbal medicine. I’m here to let y’all know that herpes1&2 virus has a complete cure, I got rid of mine using Dr Osato herbal medicine. Contact him via email: osatoherbalcure@gmail.com or WhatsApp him at +2347051705853 to get yours and be cured from HSV1&2, HPV, HIV, HERPES completely. His website is osatoherbalcure.wordpress.com

    ReplyDelete
  4. The author has discussed a very resourceful topic in times of the pandemic. We, as a nation, cannot keep our children out of schools forever. Hence a plan needs to be implemented where children can safely go to school without getting mass infected. However, it is not recommended for parents or children to go physically to the shops for book supplies. Hence there is a need for an online book shop such as KitaabNow.

    ReplyDelete
  5. Packers and Movers Bangalore - Reliable and Verified Household Shifting Service Providers Give Reasonable ###Packers and Movers Charges. Cheap and Best Office Relocation Compare Quotation for Assurance for Local and Domestic House Shifting and Get estimates today to save upto 20%, ***Read Customer Reviews - @ Packers And Movers Bangalore

    ReplyDelete
  6. Get the best of herbal medicine from Dr. onyeneke a traditional herbalist he cured me from herpes virus that I have been suffering from for the past two years now he is perfect in curing unimaginable diseases and virus with his natural roots and herbs contact him today via email on dronyenekeherbs@gmail.com or whatsapp him on +2348123354514 here are few of illness I can list
    1.. Herpes
    2.. Diabetes
    3.. Cancer
    4.. Thyriod
    5..Hsv1&2
    6.. PCOS
    7..grave disease
    8..thyriod CANCER
    9..IBS
    10..Lupus
    11..GBS/CIDP
    12..Syphilis. ETC

    ReplyDelete
  7. To find your home worth you can use a home value estimator. A home value estimator will help you to determine the actual value of your house by analyzing the recent relevant cases in your area. However, if you want to know about the best home value estimator then you can visit the Casanova Brooks website.

    ReplyDelete
  8. I'm here to testify about what DR. Odoma did it for me. I have been suffering from (GENITAL HERPES VIRUS) disease for the past 2 years and had constant pain and itching, especially in my private parts. During the first year, I had faith in God that I would be cured someday. This disease started circulating all over my body and I have been taking treatment from my doctor, few weeks ago I came across a testimony of Shayla Bosschart on the internet testifying about a Man called DR. Odoma on how he cured her from 7 years HSV 2. And she also gave the email address of this man, advising anybody to contact him for help on any kind of diseases that he would be of help, so I emailed him telling him about my (HSV 2) he told me not to worry that I was going to be cured!! Well, I never doubted him. I have faith he can cure me too,, DR. Odoma prepared and sent me Healing Soaps, roots and herbs which I took. In the first one week, I started experiencing changes all over me, after two weeks of using his Roots/ Herbs, Oil and Soap, I was totally cured. no more inching , pain on me anymore as DR. odoma assured me. After some time I went to my doctor to do another test and the result came out negative. So friends, my advice is if you have such a disease or know anyone who suffers from it or any other disease like HPV, HBV, HIV, ALS, HBP, CANCER etc. you can contact DR. Odoma for help via email} drodomasolutionhome20@gmail.com or visit his website{ https://drodomasolutionhome.simdif.com/ } whatsapp him through his mobile} +2348100649947

    ReplyDelete
  9. I feel so blessed again in my marriage after PRIEST OSAS brought back my husband that separated with me for good 3 months. ANNY ROBERT by name from California. Even though I have mouths all over my body, it won't be enough to thank PRIEST OSAS for his help in my life. My husband separated with me for 3 months and has been in pain and agony without him. So, I searched for help everywhere but nothing worked out not until I meant PRIEST OSAS who I contacted online. I explained my situation to him and he promised that my husband will get back to me within 24 to 48 hours so that my heart still beats for him. I believed in him and he prepared a spell for me and my husband called me exactly when PRIEST OSAS said. He pleaded and said he needs me back and now we are living happily again for the past 9 months. Everyone out there reading my article that needs help should contact him... Email: Unsurpassed.solution@gmail.com or WhatsApp him : +1(419)359-4367
    https://unsurpassedsolution.blogspot.com/

    ReplyDelete