Price Versus Interest Rate Expectations

Effects on Home-Buyer Decisions

Phillip J. Korb, CPA, MST, and Deborah A. Ford, PhD, and Daniel A. Gerlowski, PhD

From the 1950s until 2007, housing prices in the United States always moved in an upward direction, albeit at varying rates of growth. The Case-Shiller Index of 10 cities, now the most quoted measure of house prices, rose from 62.82 in January 1987 to 100 in January 2000. The same index stood at 226 in July 2006 (see www.homeprice.standardandpoors.com). Exceptions could be found for certain geographic areas, such as Houston in the early 1980s, or for short periods of high interest rates, such as the late 1980s, but this did not convince most Americans that single family housing prices were risky. Indeed, for many households, housing became regarded as their largest investment. Mortgage interest rates and housing prices were the primary determinants of housing payments, and buyers viewed monthly payments as the price they paid for investing in housing.