The Effect of Federal Reserve Interest Rates to Real-Estate Volume and Prices

This paper concerns two premises: One, that higher interest rates cause lower home sales and selling prices, and two, that Minot is typical of the national pattern and is as responsive to interest rate changes. The task to prove the premises was three-fold: First, the literature was accessed to determine the strength of the opinions of the first premise. Second, statistics were gathered from national and local sources and adjusted for conformity and economic reality. Third, the statistics were compared, local to national, both visually and mathematically to determine the alignment of the two statistical sets. There was overwhelming literary support to the premise that high interest rates suppress housing purchase activity. There were no contrary articles to that particular point. The literary was not as supporting to the premise of the inverse causal relationship of interest rates and housing prices. Most of those few authors on the subject were agreed, however cautious, but there were some dissenting opinions. After adjustment for seasonal fluctuation and inflation, the statistics were compared through the use of scatter diagrams and linear regression formulae. There was an exceptionally close relationship between interest rates and total number of existing homes sold as noted by the small standard deviation and large (.90) coefficient of determination. The interest rate correlation to adjusted average price of existing homes sold nationally was weaker. The standard deviation was greater and the coefficient of determination only .52. On the local level, the statistics were not nearly as strong as those nationally. This may be because of the small sampling available in Minot. Much larger comparative standard deviations and smaller determination coefficients (.55 and .00006 local verses .90 and .52 national respectively) depict local housing as being less responsive to interest rate changes as the national aggregate. There is a strong, causal, inverse relationship between interest rates and housing activity nationwide. There is some effect of interest rates on national adjusted average home prices, but other determinants combined have about as much influence. The local housing market is not typical of the national housing industry