Hidden Patterns in the U.S. Housing Market: Policy Rates, Mortgages Rates, and ETFs

The U.S. housing market is closely tied to various economic indicators. Among these, changes in U.S. monetary policy have a significant impact on mortgage rates and house prices. This article examines the correlation between policy rates, 30-year mortgage rates, and the house price index, analyzes the lag effects between them, and looks at the resulting trends in housing-related ETF prices.

To empirically examine the relationships between these factors, I downloaded relevant indicators from FRED and plotted them on graphs (see graphs below).

Data

• Federal Funds Effective Rate (FEDFUNDS)

• 30-Year Fixed Rate Mortgage Average in the United States (MORTGAGE30US)

• All-Transactions House Price Index for the United States (USSTHPI)

  
  

Data Source: Federal Reserve Bank of St. Louis, FRED (Federal Reserve Economic Data) https://fred.stlouisfed.org

Relationship between Policy Rates and Mortgage Rates

While policy rates (federal funds rate) and 30-year mortgage rates generally show similar patterns, there is a significant lag. Changes in policy rates tend to precede changes in mortgage rates, with this lag typically lasting from a few months to a year. This lag is likely due to the time it takes for Federal Reserve (Fed) policy decisions to be reflected in financial markets and banks' lending policies.

Key examples:

• Early 2000s: Policy rate decline followed by mortgage rate decline

• 2004-2006: Policy rate increase followed by mortgage rate increase

• 2008 Financial Crisis: Sharp drop in policy rate followed by mortgage rate decline

• 2015-2019: Gradual increase in policy rate followed by mortgage rate increase

• 2020 COVID-19 Pandemic: Sharp drop in policy rate followed by mortgage rate decline

Relationship between Mortgage Rates and House Prices

There is also a clear correlation and lag between mortgage rates and house prices. Generally, as mortgage rates decrease, housing affordability increases, leading to a rise in house prices. Here too, we can observe that changes in house prices lag behind changes in mortgage rates by about 6 months to 2 years. This lag is likely because the housing market doesn't react immediately to rate changes, and it takes time for buyers' decisions and market adjustments to occur.

Key examples:

• 2000-2006: Continued rise in house prices during mortgage rate decline

• 2006-2008: House prices begin to fall after mortgage rate increase

• Post-2008: House prices slowly recover after mortgage rate decline

• 2020-2022: Sharp rise in house prices after mortgage rates hit historic lows

The Fed is expected to cut policy rates in the second half of this year. If history is any guide, we might see an acceleration in U.S. house price growth, which has recently slowed, following the policy rate changes with an appropriate lag.

U.S. Housing Index-related ETFs

Furthermore, we can observe that the U.S. house price index and various housing market-related ETFs (ITB, XHB, PKB, REZ, VNQ, etc.) generally show similar patterns (see graph below). After the 2007-8 financial crisis and the sharp drop due to COVID-19 in early 2020, most ETFs quickly recovered and showed an upward trend. Of course, while ETFs reflect overall housing market trends, they may show somewhat different movements depending on their individual characteristics.

Data Source: FRED, Yahoo Finance

In conclusion, the U.S. housing market changes due to the complex interplay of policy rates, mortgage rates, and various economic factors. Understanding the causal relationships and lags between these factors provides important insights for analyzing housing market trends and making investment decisions. Investors looking to invest in the housing market can understand these interactions, continuously monitor market trends, and employ diversified investment strategies through various ETF products.

P.S. It's difficult to predict the housing market based on interest rates alone. Other factors such as economic growth rates, employment conditions, and demographic changes should also be considered.