Key Conclusions and Implications:
- In response to investor questions, we are updating our analysis of the long-term and intermediate-term correlations between residential housing values and other asset classes, rates, and inflation. As expected, while the results did not change much, the growth outlook has. Therefore, we have looked at the data through a refreshed lens.
- Cross-asset Correlations: Residential real estate returns exhibit a modestly positive correlation with commercial real estate over time, but little to no correlation historically to equities or bonds, providing potential diversification benefits.
- Correlation with Rates: Home prices exhibit a stronger correlation to GDP growth and employment growth than interest rates due to the generally pro-cyclical nature of housing values.
- Correlation with Economic Growth: Interest rates and mortgage rates have a positive, but limited correlation with home price appreciation (“HPA”).
- Correlation with Inflation: There exists a strong positive correlation between residential real estate and inflation, especially during periods of higher than usual inflation and over multi-year periods. While inflation is range bound in the 1-2% range and unlikely to move higher in the near term, we believe investments in rental housing provide potential hedging benefits for long-term investors concerned about inflation.