The Housing Boom and the Decline in Mortgage Rates

Federal Reserve Bank of New York, Sept.7, 2021–Haoyang Liu, David Luccca, Dean Parker, Gabriela Rays-Wahba
The semi-elasticity of house prices to interest rates implied by the theoretical user cost model suggests the decline in mortgage rates during the pandemic can quantitatively account for the national house price boom. But the authors’ empirical estimates and prior studies suggest the decline in mortgage rates can only explain low single-digit house price increases. Instead, they find housing activity, both sales and construction, are very sensitive to interest rates.