Interest Rates – How Important Are They to Real Estate Values?
The Interest Rate Effect: Reversion to The Mean? Will appreciation rates revert to the 30-year mean of 5% (or below) as interest rates rise? Real estate values have risen due to the low ‘cost of capital’ since 1998. Certainly low rates have added fuel to the speculative fires of real estate investors, and froth has been created by easy money. Zero down loans to first time home buyers, easy no doc loans to investors, banks competing for borrowers, even the internet have all made capital less costly and driven the real estate market higher. Inefficiencies in the market are dealt with harshly and the subprime collapse will have a ripple effect that will result in the markets swinging lower before ‘reverting to the mean’ again. While U.S. banks are considering trimming real estate exposures, by decreasing their holdings of residential mortgages by 9% since 2003, Non-U.S. banks have filled this void. As U.S. consumers save less, savers in the developing world have purchased our securities a
