Lessons from the Housing Market

by Taylor Cottom of EconomyPolitics:


There are two important things to understand from this data. First, the effect of changes in interest rates take time to work their way into housing. I showed up to a three year lag from the time that the interest rates change to the time real housing prices change. Second, we should not use the correlation matrices to forecast next year's prices. There is a lot of noise and a lot of other things that can have an effect on real housing prices. These interest rate trends take years to play themselves out. In the middle of a boom, we might have some years that prices go in the opposite direction. That should be clear.

But what should also be clear from this data is that going long on housing where inflation, and interest rates are increasing is not a wise bet. Long term interest rate trends tend to continue for a very long time so that once interest rates start to rise, it could be a very long climb to the top.