by Calculated Risk on 7/07/2013 03:49:00 PM

A week ago I posted a couple of graphs comparing House Prices and Mortgage Rates. The first graph used nominal house prices and the second graph used real house prices (adjusted for inflation).

In that post I noted that historically there has been no strong correlation between interest rates and home prices (I was agreeing with a quote from Douglas Duncan, chief economist at Fannie Mae).

As a caveat, I noted that a "key difference now compared to earlier periods, is that there is more investor buying. And investors will compare their returns on different investments - and rising rates will probably slow investor demand for real estate, even if they are all cash buyers."

Overall my conclusion was that other factors (like a stronger economy) have a bigger impact on house prices than changes in mortgage rates.

Today I looked at several previous periods of sharply rising mortgage rates as summarized in the table below.  (I looked for periods when rates increased significantly more than 100 bps in a short period.

During all of these periods the economy was growing as mortgage rates increased sharply.  In all of the periods nominal house prices increased, and only in 1994 did real prices decline (that was during the housing bust in several key states like California in the early to mid-90s).

My view is rising rates might slow price increases but not lead to a decline in prices (other than some seasonal declines).   As far as the housing recovery (residential investment such as housing starts and new home sales), I think rising mortgage rates will have a minimal impact.

House Prices During Periods with a Sharp Increase in Mortgage Rates
Date	Mortgage Rate1	Date	Mortgage Rate	Nominal House Price Change2	Real House Price Change3
May-83	12.63%	Jul-84	14.67%	6.6%	1.9%
Mar-87	9.04%	Oct-87	11.26%	5.2%	2.8%
Oct-93	6.83%	Dec-94	9.20%	1.2%	-1.6%
Apr-99	6.92%	May-00	8.52%	10.9%	7.5%
Apr-13	3.45%
1 Mortgage Rates are 30 year fixed from the Freddie Mac Primary Mortgage Market Survey® 2 House Prices are based on the CoreLogic House Price Index. 3 Real prices are adjusted for inflation.