The Relationship Between Mortgage Rates and Home Prices

October 3rd, 2012 by 

We've got a treat for you today - a spiffy graph we created with Google Drive (née Documents). Thanks to comments from fellow Burbed commenter SEA on this article, we decided to take another look at the relationship between mortgage rates and home prices.

Thought we did it once before?  Not quite - we had a synthetic measure of 'affordability', which we defined as fitting into a front end debt to income of 25%.  Got it?  Our last article talked about home price affordability, this one talks about absolute home prices.

The Relationship Between Mortgage Rates and Home Prices

We've only got enough data to go back to 1975 here, so this isn't the best possible analysis.  Convince us to use the Shiller data on home pricing, and maybe we'll build you a tool like our S&P 500 return calculator.  Or, maybe not.  Let's see what these last few years show.  (Here is my data, thanks to the St. Louis Fed and the Census Bureau)

Relationship between mortgage rates and home prices

Relationship between mortgage rates and home prices

So there you have it - there is a strong correlation between prices and 30 year mortgage rates (for median prices roughly -.75, or an R^2 of ~.58).  However, the correlation is with absolute prices, not with changes in price.  There is no correlation between changes in price and changes in mortgage rates.

So Will Lower Rates Drive Up Prices?

Maybe - but it's not going to be perfect.  A lot of the correlation during the period might just be the move to stable price controls since Paul Volker considering the entire period has roughly seen decreasing mortgage rates.  The only two times the correlation starts to go awry are during the high inflation/mortgage rates on the 70s, and during the recent recession (although there are signs of life).

So, do I think we can re-inflate the balloon?  At some point, the excess liquidity from artificially low mortgage rates will probably do something - but will it be worth it?



PK started DQYDJ in 2009 to research and discuss finance and investing and help answer financial questions. He's expanded DQYDJ to build visualizations, calculators, and interactive tools.

PK lives in New Hampshire with his wife, kids, and dog.

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