1% Rule sounds cool, but is it real?

Question

Recently a few buyers have said to me "For every 1% the interest rates raise, property values drop 10%"

I do believe that raised interest rates correlate to price drops and a buyers market. However, rates have raised from 3-7% and prices have not seen a 40% decline so that statement feels based in nothing real and tangible. What do you think?

Matthew Crivelli · Answer

@Faith Importico

I think people should be extremely cautious in this current market. (home buyers and investors) Prices will be coming down. How much? Who knows? Is a 40% decline tangible? I think it is in certain markets YES. Rates have more than doubled and we are not done yet. There is a major lag between rising rates and falling equity prices. My best advice is to wait.

Faith Importico · Answer

I'm with you Joe. I do think its a blanket term that is not accurate to each individual market. I told my buyers the market here in Philly has not seen a 40% price decrease even though rates have gone up 4%. I think a lot more goes into each deal depending on an investors strategy as well. It just isn't based in fact. Social media has people out there giving arbitrary catch phrases, and they are not an accurate analysis of the deals. If people want to follow these catch phrases as fact, then there will always be a reason to talk themselves out of any deal.

Joe Villeneuve · Answer

The 1% is as accurate as the company that makes the milk...although I prefer 2%.  As far as using it for REI, it's GARBAGE.  It assumes all markets are the same, or can be the same, or will be the same, or (worse) need to be the same.  It tells you nothing of value.

The cost of a property and the rent from that property have nothing at all to do with eachother as far as a universal rule connecting the two is concerned.  Here's where we will start seeing comments to the effect of, "...it's not a rule, it's a suggestion, to point you in the right direction, and to save time".  In other words, it's the lazy way of doing something, that produces an average to be applied to all RE that the rule is used on...when pinpoint accuracy is needed.  Even if this were true, by its own definition, it's inaccurate.  So why use it in the first place?

Faith Importico · Answer

I hear that. I think with the constant moving it creates an atmosphere of uncertainty. However, rates are not as high as they have historically been over all. It's just the constant moving that makes it impossible for all elements of the industry to catch up on efficiently. Flips in more fringe areas should definitely have buyers proceeding with caution, but buy and holds in steady neighborhoods should be super appealing with prices dropping. This is the time to get something really good under ask, and refi out when you want to.

1% Rule sounds cool, but is it real?

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