Higher Rates Won't Crush Housing

In the past 7 ¾ years, we have consistently urged investors to separate their politics from their investing. It's way too easy to say, "Their guy is in the White House; so everything must be awful – and if anything good happens, it must be fake, or a 'sugar high'."

We agree that higher tax rates, more regulation and increased government spending are wet blankets on economic growth. We also think these policies hurt the very people they're designed to help. But, for the past 7 ¾ years, entrepreneurs still found ways to create wealth. That is why we urged equity investors to stay positive.

And now that the US government is experiencing a change in management, we suspect the scare stories will come from the other side. The first is that housing will be crushed by higher interest rates. With 10-year Treasury yields (and mortgage rates) up about 50 basis points, all else equal, some homebuyers are being priced out of the market.

But all else is never equal. Interest rates are up for a reason, and that reason includes expectations for faster economic growth and perhaps a little more inflation. But growth and inflation mean faster wage growth, more jobs, and expectations of rising rents and housing prices.

Mortgage rates are still around the average in 2013-14, while personal income in that same period is up 11.4%. Yes, home prices are up about 15% versus the 2013-14 average, while rents are up 9%. However, home prices were still artificially low in 2013-14 relative to rents, so it's natural and normal that price gains have temporarily outstripped rents.