Will Rising Interest Rates Kill US Housing Recovery?

Will Rising Interest Rates Kill US Housing Recovery?

“Everyone knows that rising interest rates will kill the US housing recovery.”

“The US housing recovery is so 2013”.

“If you haven’t bought a US investment property, you’ve missed the boat.”

It seems like everyone is convinced that higher US interest rates will kill the US housing recovery and that they have missed this incredible once in a generation investment opportunity. Yes, the Federal Reserve appears as though it will likely increase its cash rate next year. But NO, that does not mean the housing market and US housing is doomed or that you have missed your chance to take advantage of this terrific opportunity. Far from it!!

In fact, based on history, the opposite is true.

Contrary to popular opinion, house prices tend to perform better when the Federal Reserve is raising interest rates (based on data going back 46 year).

This observation is counter-intuitive, but it is absolutely true.

According to analysis conducted by Stansberry Research, in the diagram below, it proves that the best time to buy US real estate is in fact when the US Federal Reserve actually starts increasing interest rates. It also shows that US house prices actually rise slower than normal when the Fed cuts rates.

Take a look…

Average Return6 Months1 Year 2 Years
Start of raising rates3.70%6.70%13.30%
Start of cutting rates1.80%4.70%8.90%
All Periods2.70%5.30%10.90%

(source: Daily Wealth, Stansberry Research)

According to their analysis, the average one year growth rate in US housing values was 5.3% since 1968. But if you had of invested just as the Fed began raising interest rates, then the average 1 year growth rate in property values would have increased to 6.7%.

If you had of held for two years, that growth rate would have increased to 13.3% compared to all other times of just 10.9% and is significantly above the 8.9% growth rate achieved when the Fed actually starts cutting rates.

This correlation is consistent across multiple times frames as demonstrated in the above table. And the numbers are also similar during all the periods of easing and tightening. In other words, purchasing US houses as tightening begins as well as during tightening, in general, beats the average return on US housing at all other times.

In addition, many US real estate opportunities in safe and easy to let markets still offer the potential for significant net cash flow as well, with gross yields in excess of 10% still very common. No doubt US house prices have risen some in the past 2 years, and the AUD has fallen some. But when you consider lending in the US is still constrained, prices are still low, new housing development has been consistently well below population growth for 7 years and with the AUD still well above its long term average against the USD, now could be a great time to make your first investment into the US housing market.

Regardless of what the US Federal Reserve does, all the driving forces that will lead to a sustained US housing recovery are still well and truly in place.

US homes are extremely affordable based on history, mortgage rates are still extremely low, credit is only just starting to flow a little more freely. Eventually these factors will lead to the re-emergence of the owner occupier market which should drive further demand for US housing.

If you have been considering making an investment in the US housing market and want to discuss what opportunities are available, contact United Global Capital today for a no cost, no obligation consultation on 03 8657 7640 or email [email protected].

The information contained in this report is General in nature and has been prepared without taking into account your objectives, financial situation and needs. 

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