This infographic is available as a poster.

Are Historical Mortgage Rates and House Prices Related?

Mortgage rates are rising at their fastest pace in at least 30 years. As mortgage rates climb, it becomes more expensive to finance a home purchase. This leaves many homebuyers with lower budgets. Could house prices drop as a result?

In this Markets in a Minute from New York Life Investments, we explore the relationship between historical mortgage rates and housing prices over the last 30 years. It’s the last in a three-part series on house prices.

Historical Mortgage Rates vs Housing Prices

To compare trends in historical mortgage rates and housing prices over time, we calculated year-over-year percentage changes. We used monthly data spanning from January 1992 to June 2022. Here’s a summary of movements over that timeframe.

November 2006 has been excluded from the above tally as year-over-year mortgage rate growth was 0.0% at that time.

Mortgage rates and house prices have a weak positive correlation of 0.26. This means that when mortgage rates increase, house prices typically also increase. What could be contributing to this trend? Mortgage rate increases are associated with periods when the Federal Reserve is raising its policy rate in response to inflation that is higher than desired. Often, this coincides with strong economic growth, low unemployment, and rising wages, which can all strengthen home prices.

Over the last 30 years, it was quite rare for mortgage rates to rise while house prices simultaneously dropped. This only occurred in the early stages of the Global Financial Crisis and during the recovery.

While mortgage rates saw some upward movement in the wake of the Global Financial Crisis, it took the housing market longer to recover. In fact, housing prices didn’t see a positive year-over-year change until March 2012.

Is There a Lag Effect?

A change in mortgage rates may not be immediately reflected in housing prices. To test whether there was a lag effect, we also explored the relationship between historical mortgage rates and housing prices two years later.* For instance, we compared the annual percentage change in mortgage rates in 2020 to housing price growth in 2022.

Here’s what the data looked like with this two year lag of housing price growth.

*We tested for a lag effect using house prices six months later, one year later, two years later, and three years later. The data using house prices 6 months later and three years later revealed no correlation between mortgage rates and housing prices. The data using house prices one year later revealed the same correlation as using house price data from two years later. November 2006 has been excluded from the above tally as year-over-year mortgage rate growth was 0.0% at that time.

The pattern was similar, albeit with a slightly negative correlation of -0.15. In other words, mortgage rates and house prices tended to move in opposite directions.

For example, this occurred in 2020 when mortgage rates were dropping and the Federal Reserve had not yet begun to raise its policy rate. Two years later in 2022, house prices were seeing record high levels of growth amid strong demand and low supply.

Compared to our first analysis above, there were also more instances where mortgage rates increased and house prices decreased. This activity all related to mortgage rates rising from 2005-2007 amid inflation concerns, with housing prices crashing in the following years due to subprime mortgages and the Global Financial Crisis.

Historical Mortgage Rates: One Piece of the Puzzle

Could the current rising mortgage rates cause housing prices to drop? In the last 30 years, there is no historical precedent for this apart from the Global Financial Crisis. Of course, subprime mortgages—mortgages to people with impaired credit scores—contributed to the housing market collapse at that time.

While researchers believe it’s unlikely housing price growth will turn negative, the pace of growth is slowing down. We can see this in the below chart showing trends between historical mortgage rates and housing prices over time.

Historically, a slowdown in house price growth has occurred when mortgage rates increase rapidly. Since 1992, there have been four instances when mortgage rates rose over 20% year-over-year for more than two months in a row. Each of them has been accompanied by a deceleration in house price growth.

Note: House price data only available until June 2022 and does not reflect any fluctuations since that time.

In the first half of 2022, house price growth slowed by over two percentage points. However, it’s important to keep in mind that while mortgage rates and affordability can play a role in the housing market, there are other factors at play. The current market is buoyed by high demand as millennials reach their prime home buying years, coupled with a housing supply shortage.

This infographic is available as a poster.

Visualizing the Real Estate Investment Universe

From residential property to data centers, real estate investment covers many different sectors.

While office, retail, and residential properties may come to mind first, the investment landscape extends to property types like health care and infrastructure—two sectors that were booming in 2021 as demand for laboratory space increased and facilities underpinning the digital economy expanded.

In this Markets in a Minute from New York Life Investments, we show the scope of U.S. publicly listed real estate investment trusts (REITs) by sector.

How Do REITs Work?

Most often, REITs are publicly-listed investments on a stock exchange. These investment vehicles manage income-producing properties and provide investors exposure to the real estate industry both through the price appreciation of property assets and the income earned through mortgages or leases.

By law, roughly 90% of this taxable income must be distributed to stockholders in dividends.

For instance, an office REIT may own a number of skyscrapers and office buildings that collect leases from tenants. This income from tenants—such as Salesforce or Amazon—would then be distributed to shareholders of the office REIT.

Today, U.S. publicly-listed REITs own 503,000 properties across the country valued at $2.0 trillion.

What are the Different Types of Real Estate Investment?

U.S. listed REITs fall into roughly 17 categories, according to data from Nareit.

Below, we will show each sector based on their earnings in the first quarter of 2022 as measured by funds from operations (FFO). FFO looks at cash flow earned from operations and is considered a broad performance indicator for the industry.

*Measured by Funds From Operations (FFO).
**Specialty includes gaming, outdoor advertising, farmland, and other non-traditional REIT property types. Data as of Q1 2022.

Despite thousands of storefronts being shut down during COVID-19, retail earnings remained the largest across all sectors, at $3.5 billion. In fact, earnings bounced back to pre-pandemic levels during the first quarter of 2022.

As the second largest sector, infrastructure saw $2.7 billion in earnings, rising over 47% compared to the first quarter of 2021. Infrastructure includes wireless infrastructure, fiber cables, and energy pipelines.

Residential, at $2.4 billion, is the third largest sector. Like retail, earnings have exceeded pre-pandemic levels, rising over 19% since the end of 2019.

Overall, real estate investment earnings hit a record $18 billion, driven by sectors hit hardest by the pandemic.

Key Characteristics of Real Estate Investments

Thanks to long-term leases—often between 5 and 10 years—REITs provide stable dividend earnings to investors. In 2021, the average dividend yield of U.S. REITs was 2.6%, more than double the yield of the S&P 500 at 1.2%.

In addition, they are often well-positioned during inflationary environments. As the below table shows, during periods of high inflation REITs average annualized returns were 16%. Even better, REIT earnings increased as inflation levels continued to rise.

Source: Morningstar (Jun 2021). REIT returns represented by the FTSE Nareit Equity REITs Index from Jan 30, 1976 to Jun 30, 2021.

While REITs are often positively correlated with inflation, they often have a low correlation with equities. For this reason, they can serve as a key diversifier when markets take a turn for the worse, potentially reducing the risk profile of your portfolio.

Due to the combination of these factors, real estate investments have proven resilient, with many REITS paying higher dividends than other forms of investments.