If we know the Fed is going to allow interest rates to rise over the coming couple of years, what impact will that have on the US housing market?

Intuitively, I would think rising interest rates = declining property values, but I was talking to someone in the real estate industry who said historically real estate value rise in periods of rising interest rates.

Separately, by keeping interest rates artificially low, is there a risk the government has created a real estate bubble?

The real world reason for asking this question is I am considering buying a house in the near future. I could buy a house today, or wait up to 3 years. Obviously, if anyone knew for sure what was going to happen to the market we would all be millionaires, but I look forward to any education that can be provided.

As is almost always the case, don't try to time the market. Interest rates are just one of many factors that determine real estate prices.

If the concept of homeownership appeals to you, and if you can afford a down payment, and if you're going to stay in one place for at least 5 years, and if you're in a market where home prices aren't wildly expensive in relation to market rents, then buy. Otherwise, rent.

If buying a house makes more sense for your personal situation than renting, by all means buy a house.

In a vacuum, rising interest rates will likely cause a decline in RE prices,as lower interest rates create more purchasing power. Run some numbers on a loan calculator and see how much more house you can buy at 3% vs 7% for an easy example.

The real world does not operate in vacuum and there are so many variables beyond interest rates which can effect home prices. Improvements in the economy or changes in the rate of household formation could outrun the effect of interest rate increases and prices could continue rising. In the past interest rates were generally raised in the face of rising economic activity which is why there are past examples of prices going up despite rising rates.

Beyond the broader economy, all real estate is local so while rising interest rates may tank fickle markets, other areas may see limited effects. Some areas have tons of cash buyers, others are heavy on FHA and other low down payment type transactions which would be more heavily influenced by rates.

Personally, I believe that when interest rates do go up this will put a damper on RE appreciation but this is just my opinion and without knowing when or by how much the rates will increase, this opinion isnt particularly useful.

id just buy in an area that has high demand - if the demand is high its safe to say these areas will appreciate better and be less prone to economic factors

The majority of my net worth is in real estate, so I too have thought a lot about this...here's my "random" thoughts on this. And if any of them are wrong, PLEASE share...I'd rather be wrong and be told why, then be wrong and no one care enough to point it out.

1.) No guarantee rates will rise....look at Japan. (even a "minor rise" wouldn't really matter that much)

2.) Even if I had an edge that rates will rise, the "cost/taxes" of selling now, then buying later, wouldn't be "made up" even if prices decline (prices wouldn't decline enough to overcome those costs is what I'm saying)

3.) Cash sitting on the sidelines earns nothing (even loses) whereas all my rentals are cash flow positive (with good returns, or I wouldn't own them in the first place).

4.) While not all of my rentals have mortgages, some do and are fixed rates in the 20+ year range to go, and at SUPER LOW interest rates, so assuming I don't sell them for 40+ years, I'm getting leverage for super cheap, which might way overcome the subpar appreciation.


I get that are situations are different (you just getting in vs. me already being in for a while now) but rates rising dramatically and real estate crisis part 2 is my biggest fear right now. (although I do think if rates were to go up a bunch, the fed would jump back in...which is what makes me not stress too much about it)

Here's the major issues yet to be mentioned.

For one, rising rates coinciding with higher RE prices is in fact correct. The two are however unrelated as to the reason, though rising rates do dampen things. The reason for rates rising is ultimately why RE prices will tend to rise. Generally speaking, rates begin to rise when the economy is definitively in growth mode. A stronger and growing economy, with rising income, and lower unemployment equates to more creditworthy borrowers, and thus more demand for housing and nicer housing. This overcomes the increased price from higher rates.

Secondly, rates aren't really going to rise that much. You have to think about the global macro environment to see why rates have been stubbornly low despite a wind down of QE. The USD has strengthened immensely, and will very obviously continue to do so, making US assets more worthwhile. For example, If you live in the EU, and your euro is expected to continue declining in value against the USD, buying a US treasury lets you "go long" the USD and provide protection against a devaluation of your EUR. This is again the result of the fed winding down QE, and subsequently the ECB ramping theirs up. Furthermore, since the yields of bonds within Europe are incredibly low compared to the US, and will presumably get even lower, this is further cause to be invested in US treasuries instead. Since the rates of any credit product in the US are tied to the treasury rate (or LIBOR), real estate rates will remain abnormally low for a while as well.

Case in point, I wouldn't sweat these things too much. Yes rates will rise, but it will not be some rapid increase into oblivion, and the economic strength will matter far more.