For years interest rates were the number one indicator for real estate prices.  In this cycle interest rates have more than doubled yet real estate prices have barely budged.  If we look back at 2008, the impetus for the large real estate crash was rising interest rates but this cycle is reacting differently to rising rates.  Are rising rates still the right metric to use to predict where real estate prices will head?  There is a better metric for this cycle.  What one variable should we be watching instead?

Housing prices have finished falling

Lennar Corp., the second-largest US homebuilder, is calling an end to falling housing prices — but doesn’t yet see a recovery in sight. “Home prices have come down about 10%,” Executive Chairman Stuart Miller said Thursday in a Bloomberg Television interview. “They’re probably going to remain right there at least for the foreseeable future.”

He qualified that assessment by saying his outlook was subject to change in the event of interest rates moving higher, a day after Miami-based Lennar reported quarterly earnings and the Federal Reserve announced a pause in its hiking cycle.

Interest rates not best indicator for the current real estate cycle

We’ve seen 30 year mortgages rise from a low of around 2.75% to well over 7.5% in a short period.  At the same time, prices of residential real estate have not reflected the swift change in rates.  Just the opposite has occurred with many markets continuing to increase in price while others have basically settled at around their peak prices.  This is opposite of what we should expect.  Why are prices not reacting the same way they did in 2008?

Lock in effect of lower rates:

Approximately one-third of outstanding mortgage balances was refinanced during the seven quarters of the refi boom, and an additional 17 percent of mortgages outstanding were refreshed through home sales during a time of high demand for housing.  Then, rates rose by 400 basis points from a historically low 2.68 percent contract rate on 30-year mortgages in December 2020 to 6.90 percent in October 2022, a swing of an amplitude not seen since the early 1980s, according to Freddie Mac’s Primary Mortgage Market Survey. By the first quarter of 2023, incentives to refinance were harder to find, and the refinance rate dropped near a historic low.

Fewer variable rate products

Prior to the 2008 crash there was a surge in variable rate products that had very low intro rates and then reset to much higher rates.  The usage of these products radically decreased post 2008 crash due to increased regulation requiring substantially more verified income.  This is the primary factor that has led to the lock in effect mentioned above.

How will the prior lower rates impact real estate today

I’ve been talking the last year about the Golden Handcuffs of low rates.  The recent federal reserve study came to the same conclusions: “The end of the most recent exceptionally low interest rate period leaves homeowners somewhat disincentivized to sell or change properties: Owners now looking to move will face increased borrowing costs and higher prices, with current home prices being more than 36 percent higher than they had been pre-pandemic.”

Market stuck until there is an economic shift

Long and short, the refinance boom handcuffed millions of borrowers who have locked in record low interest rates.  Until there is a big change in the economy, the days of low inventory and steady prices are upon as few will have the incentive to move.

Don’t totally count rates out

Although higher interest rates will not drive real estate prices lower like in the last cycle, they will eventually impact the economy through tighter business credit and less liquidity for consumers as higher interest rates on cars, credit cards, etc… bite into consumer spending.



Key Metric  to watch: Labor market

The new metric we should be focusing on in this cycle is employment.  The labor market continues to hold up and substantially outperform.  The lock in effect of historically low pandemic rates will remain until there is an impetus for people to sell.  The largest driver will be unemployment.  So far there has been no reset in the labor market, ironically the opposite has happened with unemployment continuing to fall even considering rising rates.  But do not get complacent as employment will have to radically change as liquidity is taken out of the market by the federal reserver.


I don’t see a large shift in pricing for a while longer until there is a bigger shift in the economy and unemployment ticks up substantially.  Although many are calling all clear on residential real estate, I would be hesitant to make this call.

In every cycle there has been an increase in unemployment, this cycle will not be radically different.  Once unemployment increases and the economy resets, there will be a significant loosening of inventory as borrowers are forced to sell/move. This increase in inventory will ultimately drive housing prices lower.  Unfortunately at the same time many are forced to sell, interest rates will continue to remain high due to stubborn inflation which will compound the pain in the real estate market.

The current cycle is happening a lot later than predicted as the economy remains strong but look for the lock in effects of lower mortgages to start loosening as unemployment ticks up sometime next year which will ultimately lead to a reset in residential prices.

Additional Reading/Resources


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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 MagazineThe 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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