Historical Real Estate Prices in a Rising Interest Rate Environment

Discussions about rising interest rates and the corresponding impact on mortgage borrowing rates is a popular news topic. The average rate continued to rise, with the fixed 30-year mortgage increasing to 4.38% last week from 4.32% and 4.22% the prior two weeks, according to Freddie Mac (all mortgages rates referenced are based on this agency’s information). This is has been steadily increasing, up from under 4% at the end of last year.

Everything else being equal, higher borrowing costs means a larger monthly payment. You can use the situation to your advantage in negotiations to perhaps strike a better price, more than making up for the higher interest rate, while also reaping a larger potential capital gain down the road. Since this is a complicated area, it is useful to break it down how New York City real estate has done in various interest rate environments.

The ‘70s

This was a difficult time for the country and the city. In fact, NYC nearly went bankrupt. Macroeconomic issues affecting the country and the city included the OPEC embargo, with gas prices doubling twice in the decade. Along with other factors, this helped drive double-digit, “run-away” inflation. In 1973, inflation jumped from under 4% to nearly 10%, and the Federal Reserve raised short-term rates in an attempt to get it under control. Similarly, the Fed raised rates to about 20% in 1979-1980 to break inflation’s back.

The 10 year Treasury rate started the decade under 10%, and finished near 11%. Highlighting a particularly difficult period, at the start of 1974, the yield was 6.99%, and finished 1979 at 10.8%. Meanwhile, the 30-year mortgage rate went from 7.3% in April 1971 (the furthest back Freddie Mac’s data goes) to nearly 13% by the end of 1979.
The NYU Furman Center, which studies public policy and real estate, noted prices fell 12.4% from 1974 through 1980. Interestingly, while the other boroughs experienced price declines, Manhattan’s real estate saw a 29% increase.

The ‘80s

The decade started with negative sentiment about the economy, with Federal Reserve Chairman Paul Volker driving up short-term rates. The 10-year yield peaked at nearly 15% in 1982, and the 30-year mortgage fixed rate reached 18.6% in 1981. The mortgage rate bounced around a bit but ended the decade in the upper-9%-10% area.

After the early-1980s recession, the economy performed well. This helped lead to a strong real estate market. With inflation taming and lower borrowing costs, real estate prices, which had been tempered the previous decade, thrived. New York City experienced a 152% price increase, with Manhattan, Brooklyn (particularly areas close to Manhattan), and Queens doing better than the city’s average.

The ‘90s

The decade started off in a recession, partly triggered by the S&L crisis. Lending standards tightened and credit becomes more difficult to obtain. However, the Clinton presidency brought on more aggressive deficit reductions, and long-term interest rates fell. Along the bond market doing well, stock and real estate prices soared.
Ten year Treasury yields started at 8.2% and began 1999 at 4.7%, although it rose to 6.7% at the end of the year. Mortgage rates were 9.8% and finished the 1990s at 8.1%. Prior to the end of the decade, rates hovered at the 7% level and even dipped below it.

New York City’s real estate prices fell in the first half of the decade. In the 1989-1996 period, prices were down 29%, with Manhattan, the Bronx, and Staten Island performing worse. This came about despite generally falling interest rates. The 30-year mortgage rose from 9.8% to over 10% during 1990, before falling through 1994. The mortgage rate was under 8% by the end of 1996.

The mid-‘90s to 2006

During this time, which included the bursting of the tech bubble and 9-11 terrorist attack, mortgage rates fell dramatically. It was below 6% at one point. The recession was brief, and New York City’s real estate prices rose 124%. Manhattan and Brooklyn were notable hot spots.

2007-Current

Furman doesn’t have pricing data for this period, which started with the severe recession and housing crash. Mortgage rates were above 6% for most of 2007, but have generally been below 5%, and even lower than 4% for the latter parts of the current era. New York City’s real estate, responding the severe economic conditions, fell sharply, before spending the last several years in a recovery as the economy rebounded.

Final thoughts 

Interest rates are one factor among several that impact the real estate market. It appears the overall economy is the most important. During the last recession, while mortgage rates fell, real estate prices did not recover until economic conditions, particularly the jobs market, improved, making people more confident about making a large-scale purchase.