What really drives house prices?
Low interest rates and loose regulation just don’t seem to cut it. They only explain the short period starting around the turn of the millennium.
It could be currency. Or in the simplest terms, the real value of the dollar in terms of gold — as in the gold bullion held by the SPDR Gold Shares (GLD) exchange-traded fund — has a huge impact on the trend in home prices. While it doesn’t explain everything, it does explain at lot.
If the dollar is weak vs. gold, then home prices grow faster. The pattern is pronounced enough that it makes blaming weak home prices on the Federal Reserve and bank regulators start to sound hollow.
Here’s a recap of how different periods of huge home price growth were as different as the Amazon jungle and the Sahara desert. For that reason, some more holistic reasoning is needed.
Over the period from January 1972 through January 1980, the median price of a new house jumped from $24,700 to $62,900, according to data from the Federal Reserve Bank of St. Louis. The average annual compounded growth rate was more than 10%.
It wasn’t loose regulations or easy monetary policy.
- Interest rates were high. The 30-year fixed rate mortgage was always above 7% in the 1972 to 1980 period, according to government data.
- Adjustable-rate mortgages, or ARMs, which eventually made home buying easier for some borrowers, didn’t exist for most people.
- Banks were largely restricted to doing boring things by the Glass-Steagall Act. They weren’t gambling.
- The securitization of mortgages was not a major factor in the market at that time. Three decades later, mortgage-backed securities let capital flow to previously underserved potential homebuyers.
- The 1970s were the opposite of the freewheeling years from 2000 through 2006, which ended in the Great Recession.