For the past two weeks we have assessed the reasons that home prices are rising. Without rehashing this data, suffice it to say that home prices are rising because the real estate market is finally recovering from a horrible slump. Many analysts are now debating whether recently rising interest rates may put a halt to the real estate recovery and the stock market rally as well. In our mind there is a direct relationship between rising home prices and higher rates. Why? For the past three plus years, we have seen a tepid economic recovery from a very deep recession. If one looks at the numbers today, the recovery still does not look strong. The economy has grown at an average of just over 1.0% for the past two quarters. That is not exactly robust numbers. The difference is that today the economy is being supported by positive growth from the real estate markets.
Real estate is a big part of the economy that fuels important behaviors such as consumer spending. When someone buys a house, they also tend to purchase furniture and undertake home improvements. We believe the markets are thinking about the future, not the past two quarters. Two years ago when economic growth slowed down, there was significant talk of another recession. Today, you don’t see the same level of fear. Home prices are up because the real estate markets are recovering. Rates are up because the economic recovery is on more sound footing with a real estate recovery supporting the upturn. The jobs report released on Friday was definitely indicative of this better news. Not only was the 195,000 jobs added more than forecast, the previous two months were revised higher by 70,000 jobs and hourly earnings had a solid advance as well.