Should real estate watchers -- from professionals to homeowners -- think rising mortgage rates will kill the housing market?
As a common logic goes, pricier financing translates to fewer qualified buyers ... and those folks who can pass a lender's muster will have less cash to spend thanks to higher mortgage rates. A double-whammy for housing?
Unfortunately, that thinking misses a key ingredient in the real estate math. No, it's not where inventory levels are headed. Or the size of the crowd shopping for property.
It's more basic: Jobs. Jobs. Jobs.
Too often we forget it takes solid employment to sanely secure real estate. And what is a main reason interest rates rise? A toasty economy bordering on overheating. When unemployment is scarce and wages are rising.
Yes, higher rates nudge some house hunters out of the market. And I truly feel for those folks. But that same surging economy typically creates numerous work opportunities with salaries that can create house hunters, too.
That helps answer the "Who can afford these homes?" question.
To help explain my thesis, I filled my trusty spreadsheet with quarterly data for mortgages, employment, housing and inflation -- California and U.S. -- collected by the Federal Reserve Bank of St. Louis.
Starting with 1975 through last year's third quarter, I looked at periods spanning four quarters and ranked them by the severity of change in the national average 30-year fixed mortgage rate.
Next, I compared how employment and real estate prices, as measured by a federal price index, performed when rates rose the most and compared those trends with eras when rates dipped the most.
Just so you know, in these times of fast-rising rates since 1975, mortgage rates rose an average 1.5 percentage points in a year. When they took step dives, rates took an average 1.6 percentage-point decline. And here's what I found ...
Rates Up, Prices Up
At first glance, owners should cheer rising rates.
California homes appreciated 10.5 percent in 12-month periods when rates rose the most vs. 2.2 percent in periods when mortgage rates took their deepest dives.
Nationally, home prices rose 6.7 percent when rates rose the most vs. 3.1 percent when they took their deepest dives.
Those are pretty significant gaps.
Jobs. Jobs. Jobs.
Do not forget this.
California employment grew 2.5 percent annually with rates jumping compared with just a 0.5 percent gain in 12-month periods when mortgage rates tumbled. Similar trends were found across the country: U.S. jobs gained 2 percent when rates rose the most vs. 0.4 percent when mortgages dived.
Watch the job market, please!
Remember, a key role of the Federal Reserve is to watch the cost of living.
The central bank adjusts the rates it controls accordingly to manage inflation. When mortgage rates rose the most -- with strong home appreciation and job growth -- inflation averaged 6.3 percent annualized growth. When rates fell dramatically, inflation averaged 2.2 percent.
Inflation bumps up the cost of living and cuts into the theoretical value of housing profits.
Ponder what you find when you subtract the inflation rate from home appreciation, or what economists call the "real" rate of return.
California home gains in times of mortgage rate jumps shrank to 4.2 percent annualized when inflation was subtracted vs. after-inflation gains of 0.1 percent with diving rates.
And nationally, inflation-adjusted home gains were actually better in falling-rate periods: U.S. price averaged 0.5 percent a year when rates rose the most, trailing 0.9 percent gains when rates plummeted.
Rising rates aren't an instant break on the economy or real estate. So what about, say, two full years after big rate hikes?
Rising-rate periods still win, but by significantly less: In California, 8.8 percent annual gains in home appreciation two years after rates soared vs. 7.5 percent when they tumbled. Nationally, the ups win, too: 6.4 percent vs. 4.7 percent two years later.
Why? Seems cheaper rates get bosses in the hiring mood ... eventually!
California jobs grew 2.1 percent two years after rate hikes vs. 2.2 percent when rates tanked. Nationally, the annualized hiring gain of 1.5 percent after rates skyrockets was actually topped by 2 percent job growth two years after steep dips in rates.
The Bottom Line
Four decades of economic history strongly suggests pricer mortgages can cool, not kill, a housing market. That's because of a main reason rates rise: more paychecks.
So when interest rates soar, it's usually time for most people to be thankful for the forces nudging finance costs higher.