The title of this blog is crazy, how is it possible for interest rates to rise and stock prices continue to rise? Look at the chart below; this is exactly opposite of what traditionally happens. At the same time, how can real estate price be basically flat in most markets with mortgage rates hitting decade highs? Will history repeat or is the economy now radically different? What does this mean long term for real estate prices?
Historically high rates mean lower stock prices
Interest rates and the stock market generally move in opposite directions, meaning higher rates tend to pressure stocks downward while lower rates help the market grow.
Why do stock prices and interest rates Move in Opposite Directions
- Borrowing Costs: Higher rates make it more expensive for companies to borrow money. This cuts into profits, limits expansion, and reduces funds available for new projects.
- Consumer Spending: Loans for big purchases like houses and cars get pricier when rates rise. Consumers buy less, which lowers revenue for businesses.
- Alternative Investments: Higher rates mean safer assets like bonds and CDs pay better returns. Investors move money out of riskier stocks and into these fixed-income options
The historical correlation between the S&P 500 and the yield on bonds is not occurring today. Bond prices and the S&P 500 have both continued to increase which is exactly the opposite of what history says should happen. This begs the question as to why the historical correlation has broken
Why are stocks and bond yields both rising?
One explanation is that “Despite higher interest rates, solid corporate earnings growth supports equity prices.”- Rob Haworth, senior investment strategy director with U.S. Bank Asset Management Group.
The other explanation is that the market is putting its head in the sand:
Meanwhile, there’s a sneaking suspicion that the bond market’s concerns aren’t being fully heard. After his former protégé, Treasury Secretary Scott Bessent, said the U.S. would double repurchases of long-term bonds when they hit a previous peak, star hedge-fund manager Stanley Druckenmiller cried foul in The Wall Street Journal. The title of his op-ed? You guessed it: “Let the Bond Market Speak.”
Long and short nobody knows exactly what is causing the disconnect but history has a way of repeating itself so the “market” should be on notice that we could be in for a big stock market correction.
Why care about stock prices for real estate?
The reason I am focusing on stock prices is because the “wealth effect” along with government spending is what is powering the economy to record highs. The reason is that people look at their stock portfolios and open their wallets with spending. Here is what the federal reserve said about the wealth effect: “The movements in net worth and the saving rate are consistent with a direct view of the wealth effect, in which an increase in wealth directly causes households to increase their consumption and decrease their saving.”
How can real estate prices remain flat with huge jumps in rates?
The wealth effect in turn is also what keeps the housing market flat for the time being. As property owners feel “wealthier” there is no impetus to take a lower price. Unfortunately this theory is fleeting. As inventory piles up and when there is a stock market slow down we will see a direct decline in prices in many markets that now have increased inventory.
Is the economy radically different to buck traditional trends
This brings up the question of the hour, why are stock prices and interest rates both rising as opposed to rising rates causing stock prices to fall? My gut is that this is a temporary phenomenon that will ultimately come back into line with historical patterns. In every single cycle, a large increase in interest rates ultimately led to a reset somewhere in the economy. We haven’t seen this yet for two reasons:
- Government spending: The huge deficit spending by the government is adding fuel to the economy to keep it going much longer than we have seen historically
- Government trying to control the yield curve: Along with government spending, the treasury is also working hard to bring down long term rates by buying longer dated treasuries to help increase prices which leads to lower interest rates.
Both of the items above are not sustainable and eventually the bond market will “win” meaning that rates will rise substantially higher forcing the government to stop the budget deficit spending as they can no longer afford the interest payments without printing more money substantially increasing inflation.
History will repeat and the path ahead will get rocky
I would urge everyone to not look past the market complacence. The bond market will always “win” and find equilibrium which means that assets like stocks and real estate will need to adjust downward. We are in interesting times with runaway deficits that will ultimately flow through to riskier assets like Stocks and Real estate. The million dollar question is when the music stops, because ultimately there will be a triggering event that upsets the apple cart.
Additional Reading/Resources:
- https://www.fairviewlending.com/interest-rates-surge-frightening-bond-market-change/
- https://www.fairviewlending.com/can-aspen-and-telluride-predict-real-estate-prices/
- https://www.fairviewlending.com/is-stagflation-the-new-risk-for-the-mortgage-market/
- https://www.usbank.com/investing/financial-perspectives/market-news/how-do-rising-interest-rates-affect-the-stock-market.html
- https://www.wsj.com/opinion/let-the-bond-market-speak-81529d74?
- https://www.federalreserve.gov/econres/feds/disentangling-the-wealth-effect-a-cohort-analysis-of-household-saving-in-the-1990s.htm
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Glen Weinberg personally writes these weekly real estate blogs based on his real estate experience as a lender and property owner. I’m not an armchair reporter/writer. We are an actual private lender, lending our own money. We service our own loans and own commercial and residential real estate throughout the country.
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Written by Glen Weinberg, COO/ VP Fairview Commercial Lending. Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in Bloomberg, Businessweek ,the Colorado Real Estate Journal, National Association of Realtors Magazine, The Real Deal real estate news, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.
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