I’ve been thinking about your results in the context of my monthly payment chart:

My interpretation of this chart has always been that it shows that rates haven’t had a ton of influence on home valuations. If they had, then the red line would mean revert around a pretty flat line across the whole chart. In other words, monthly payments would be the constraint, and home prices/valuations would move up or down to accommodate a pretty constant monthly payment (as a % of income).

But that’s definitely not happening in this chart. In the 70s and 80s, valuations didn’t plummet to accommodate high rates. Instead, prices hung in there, and people paid a much higher monthly payment (as a % of incomes or rents).

Thus my conclusion that you can’t really value housing based off rates.

However, if you take a closer look at my graph, there are really 2 regimes there. In the 70s/80s, home prices weren’t influenced so much by rates. However, starting in the 90s, we DO see that more flat trend line where (with the exception of the bubble), monthly payments tended to stick to a somewhat constant level.

And that fits in perfectly with your conclusions — prices really have followed rates pretty closely. But if we were to extend your study back in time, we’d find that this wasn’t nearly so much the case.

What do we make of this? Well, it happens that this is actually a fairly controversial topic in finance generally.
One camp claims that lower rates justify higher stock valuations, pointing back to 30-40 years of a clear correlation there. The other camp points out that prior to that period, there was no such correlation! (Here is an article exploring some of the long term data). There are other arguments as well, such as: if low rates are such a benefit, why are stock valuations in Europe and Japan much lower than the US, while their rates are ALSO lower? IE, it seems that this relationship has only taken place in the US, which undermines the idea of a causal relationship.

So I just wanted to put that out as a note of caution here. xbox’s analysis happened to cover the period where there was an unusually strong relationship between rates and the prices of RE and risk assets generally. But, this relationship is not written in stone.

Now, let’s say the relationship does remain intact. xbox’s results jibe with my general view that even through prices look high, when you consider interest rates, they aren’t nearly so bad.

However, based on these charts I’ve refined my view a bit. Looking at my monthly payment charts, I was thinking, we’re still below the historical (post-1977) median. But that includes the prior regime. If we only look at the 90s+ regime, with that tight relationship between rates and prices, then we ARE in fact overvalued even considering how low rates are. xbox’s charts do a good job of showing that. But, it’s a reasonable level of valuation, part of the normal ebb and flow, and nothing I’d consider remotely bubble-like. (Of course I mean overvalued based on this model… there are of course things going on outside the model, eg long term supply and demand changes, which could impact fair value.)

The other thing to consider is that if the rate/price relationship remains intact, this doesn’t tell you much about future prices anyway, UNLESS you want to posit that you know what rates are going to be. It’s my view that rates (and inflation, which heavily influence nominal rates) are poorly understood, and that the world’s most preeminent economists and asset managers disagree on what the course of rates will be. IE, I don’t think anyone can really make a high confidence forecast on rates. So IF the rate/price relationship remains intact, it is a fact that any home price forecast has an embedded interest rate forecast.