The Impact of Rising Interest Rates On Real Estate Will Be Dramatic

Rates have risen from a low around 1.6% for the 10-year treasury, to 2.75% recently, or by 72%.  This is a massive, massive move, resulting from the $80 billion+ that exited bond mutual funds and ETFs in June.  The impact on the real estate market, should rates not return to historic lows, and especially if they continue to rise, will be unprecedented.  In a recent article published on CNBC’s website, the following comparison was made:

We only need look to the $8,000 home buyer tax credit that expired in 2010. The fall off was dramatic.

“That stimulus was so small compared to a 3.5 percent interest rate, it’s almost not even a comparable, but it’s the only thing I can find,” said Mark Hanson, a well-known mortgage analyst in California who predicted many aspects of the mortgage market crash. “When that stimulus went away, new home sales fell 38 percent in a single month, down 25 percent year-over-year, and existing home sales fell 30 percent over a single month, 24 percent year-over year.”

Housing prices are certainly lower today for most markets than they were in 2010, but the risk is substantial, nonetheless.  The reality is that real estate performs poorly in a rising interest rate environment, and we are starting into the rising rate period from historic lows, so there is a lot of room for rates to rise.  Real estate could perform poorly, and could under-perform other asset classes, for years, if rates enter a sustained period of increases.


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