Pension prices, prices, and home prices – Center for Retirement Research

I recently spoke with a couple looking to sell their home. Their Realtor told them the market is a little soft but added that interest rates are likely to rise this year. The proposition is that falling prices can increase home prices. That’s a common thought, but it left me wondering if it’s always true.

Two important questions here are worth asking. First, when do interest rates always fall when the Federal Reserve raises interest rates? And second, even if withholding tax rates go down, should we expect home prices to go up as a result?

To help answer these questions, I spoke with Eric Steuernagle, owner of fairground real estate in Great Barrington (MA) and a real estate expert. I also looked at decades of data on interest rates and home prices.

Fed funds and withholding tax rates

The Fed directly controls the short-term interest rate known as the Federal Funds rate. This rate is that banks are competing for loans overnight, so it is very different than the rate you build on a 30-year loan. Bonded tax rates are highly correlated with long-term rates, influenced by inflation, investor expectations, housing demand, and world events.

However, historical data shows that short-term prices and long-term prices generally move in the same direction. Since the late 1980s, the average spread between the Fed’s target rate and the 30 percent mortgage rate has been three percentage points (see figure 1). So, if the Fed’s rate is close to 3.5 percent, mortgage rates may settle at around 6.5 percent – about where they are today.

This is one of the reasons Steuernagle doubts housing will become more expensive. He says home prices can go up “if you think about it.” [mortgage] Interest rates return to 2.75 percent [where they were at the beginning of the pandemic]but it may be once in a lifetime. “

The Fed Cuts the Fed Funds Rate by 0.25 percent each in September and October. The market still expects a higher 0.25-point percentage cut this year, although it is uncertain. The goal is to stimulate the economy as signs of labor justice emerge. So, while fed cuts may bring prices down slightly, there is no guarantee that they will fall by a large amount.

Historical data suggests that long-term loan rates, including mortgage rates, may fall slightly when the Fed lowers its overnight lending rate. But in Steuernagle’s area, withholding tax rates in the 5 to 6 percent range are more attractive to buyers than the 3 percent rates we’ve seen in the past few years.

Tax rates and local rates

Even if the rotten prices have come down, the big question is what that means for home prices. In theory, lower mortgage rates make monthly payments more unaffordable for consumers, who must support higher home values. But history shows the connection is not very far.

Consider four austerity cycles in recent decades:

• Early 1990s (Gulf War Recession): Excise duty rates fell from about 10 percent to 7 percent between 1990 and 1993. Still, home prices rose, rising just 2 percent over four years.
• Early 2000s (DOT-COM BUST): Rates fell from about 8 percent to 6 percent between 1999 and 2003. Meanwhile, home prices are rising, up 40 percent nationally.
• 2007-2008 (Global Financial Crisis): Prices have decreased from about 6 percent to 5 percent, but home values ​​have gained 17 percent as the housing market has collapsed.
• In 2019-2020 (Covid-19 Pandemic): Excise duty rates were thrown from 4.5 percent to records – 2.7 percent. Home prices stood at 14 percent and continued to rise thereafter.

The takeaway from these episodes is that economic factors such as unemployment, stock market performance, and financial problems can outweigh the impact of falling rates. It’s also important to remember that real estate markets are in a big place. Taxes, job opportunities, school quality, and community factors all increase available and sought-after in ways that national tax rates do not fully explain. In fact, says Steuernagle, taxes and other local factors are worth the money assessment.

The bottom line is home values

It’s reasonable to expect mortgage rates to fall in response to rate cuts, but that doesn’t mean home prices will automatically rise. If anything, broader economic trends and larger market forces will play a bigger role than feed-back policy alone.

Luke Delorme, CFP® is director of financial planning at Tableux Wealth in Great Barrington, MA (www.tableauxwealth.com), accessible at luke@tableauxwealth.com. To stay current on the low-profile blog, join our free email list.

This blog post is for informational and educational purposes only and should not be considered financial advice. See a qualified professional for specific advice in your situation.