Housing Prices

The price of homes is rising at a faster pace than ever before, with some prime areas seeing rises of nearly 50 percent over the past year alone. Over the last five years, prices have risen 48 percent on a nationwide basis; prices have risen 234 percent since 1980.

When the Fed loosens the money supply by lowering interest rates, the result is that more people buy homes, more people are able to qualify than would be able to qualify if interest rates were high, and overall demand for homes increases. The Fed’s goal in lowering interest rates is to stimulate the economy; if successful, people have more money to spend, more jobs are created, and the law of supply and demand kicks in and the price of a house rises.

At the same time we have been seeing historically record low interest rates, we are also seeing rapid rises in home prices. But if home prices rise when interest rates fall, what happens when interest rates rise? Will housing prices fall? If this were the case, an argument could be made that it would be wise to wait for high interest rates to buy a house; although not very many people would recommend such an action.

A more direct correlation is seen between interest and bond prices; when interest rates drop, bond prices rise; when interest rates rise, bond prices drop. It’s a simple relationship. The relationship between interest and housing prices is not so simple, though. Historically, though, housing prices seldom drop regardless of the interest rate.

Currently, high housing costs are viable, because interest rates are low, and even though the price of a home is historically quite high, buyers are still able to afford the higher prices because the mortgage rate is at a historic low.

But what will happen when interest rates go back up? Will those high prices continue to be sustainable? Some economists believe that the United States is seeing a housing “bubble,” and that the rapid pace of rising home prices is unsustainable.

Barring an unlikely disastrous event such as a major depression-like economy on the scale of the 1930s-era Depression, however, home prices are not likely to drop; rather, they are more likely to just continue rising at a more moderate pace.