Housing Market in Relation to Interest Rate

[beerbaron]

Hi I'm doing an analysis on when a house should be bought. Does anybody have a good research paper on housing market VS interest rates? Particularly, I'm looking for the lag between rate change and correlation.

 

Thanks

BeerBaron

[beerbaron]

I found something that has some good empirical data for those interested. I'd be interested in other's inputs on this, some data point to positive correlation between interest rate and housing price, which seems to defy classical monetary theory.

 

Thanks

BeerBaron

work665.pdf

[randomep]

ya I am interested, but I don't have the time for a 55 page paper...... can anyone give a TLDR?

[beerbaron]

Here are what I got from it. I found it very insightfull.

 

-1% increase in interest rate represents about 5% drop in market value.

-The 5% drop will take 3Y to happen because it's illiquid.

-Almost no short term correlation with interest rate change.

-Short term rate seems to affect more than long term rate.

-Real estate cycles are many decades long. Population growth is probably a big factor of that. Keep an eye on japan for what will happen in other countries, population in japan peaked 10Y ago.

-US rate has an impact worldwide. About half of the local interest rate impact.

 

-One unaswered question that I have is if there are no sales and a complete writedown (ghost town) would it show up? Probably not because there is no transaction. That might be part of the reason for real estate outperformance... the dead assets are just not transacted.

 

BeerBaron

[Gregmal]

15 hours ago, beerbaron said:

Here are what I got from it. I found it very insightfull.

 

-1% increase in interest rate represents about 5% drop in market value.

-The 5% drop will take 3Y to happen because it's illiquid.

-Almost no short term correlation with interest rate change.

-Short term rate seems to affect more than long term rate.

-Real estate cycles are many decades long. Population growth is probably a big factor of that. Keep an eye on japan for what will happen in other countries, population in japan peaked 10Y ago.

-US rate has an impact worldwide. About half of the local interest rate impact.

 

-One unaswered question that I have is if there are no sales and a complete writedown (ghost town) would it show up? Probably not because there is no transaction. That might be part of the reason for real estate outperformance... the dead assets are just not transacted.

 

BeerBaron

+1. Anyone interested in housing or real estate needs to internalize many of these points noted. It is a VERY different market dynamic than stock market investing but often gets confused as one in the same. The beauty is when stock market participants or pee on hedge funds mistake the two and then you get these wild opportunities in the public markets that you’d never get in the private market. Conversely from 2010-2018 or so the private market was much more appealing than the public. So if you know what you’re doing you just play the value angle. 

[Ulti]

Barron's summary

 

Pg 15: The flip side of hot housing markets is that many potential owners may remain RENTERS for longer and that is bullish for APARTMENT REITs (-20% YTD). They are trading at -21% discounts to NAVs, have attractive yields and fwd P/FFO. Housing is CYCLICAL, and prices should weaken with expected recession. At the same time, housing is NONDISCRETIONARY as people have to rent or own. Mentioned are AVR, EQR, ESS, CPT, MAA, AIRC, UDR.