It is a really difficult question to answer. Interest rates relative to price is also something that we do not have much data on. Certainly the rates we saw in the late 70s and early 80s would have a substantial impact on prices. However when we had those rates in the early 80’s there was no real estate catastrophe in San Diego. Yes it was affected but not in an “end of the world” sort of way.
Given the pricing we have now I am not sure how the market will react. No doubt that if we are in a situation where mortgage rates are at 7 or 8% I believe we will see a definite decrease in the number of buyers.
How about sellers?
I think there are several dependencies that while subtle can be overlooked. Think about the following factors…
– Homeowners locked into low rate 30 year or even 15 year mortgages.
– Is there wage inflation?
– Are there accompanying factors that also are going up? Rents? Cost of fuel, food, etc?
These factors may play a much greater role then the reduction of buyers in the pool. One can make a case that it may be easier and financially beneficial to not sell and either rent the property out, (especially if rents are high which is the case in high interest rate environments) or just sit tight. While the asset (home) may be depreciating, it is being serviced using a low interest rate vehicle at a time when the supply of money is very tight. Why sell?
So…
I guess my point is that one can make an argument in either direction as to what happens when (not if) rates go up again… or perhaps we are a big version of Japan and we sit with low rates for 20 or 30 years. Hey we have done it for more then 10.
