Europe Just Cut Rates. Does It Matter?

"Despite marked improvements in employment and the overall economy, the rapid increase in home prices and interest rates are pricing first-time homebuyers out of the local market. As more and more of these households become renters instead of buyers, we will continue to see fewer vacancies and higher rents."

-Richard Green, Real Estate Director at USC Lusk Center

Hi Nuvo Community,

The analysis of interest rates set by the Federal Reserve and the European Central Bank provides insights into the broader economic landscape. While there is a strong correlation in their raw interest rate data, the YoY changes reveal a much weaker relationship. Additionally, the Federal Reserve rate is often higher than the ECB rate, highlighting differing monetary policies and economic conditions in the US and the Eurozone. This analysis sheds light on the implications for apartment values and the broader real estate market.

Methodology

Our analysis utilized monthly data on the Federal Reserve and European Central Bank interest rates. We examined both the raw data and the YoY percentage changes to uncover trends and correlations. Correlation analysis was used to understand the relationship between the rates, and we highlight that the Fed Funds rate was usually higher (75% of the time) than the ECB rate going back to 1999.

Correlation Analysis

The raw data reveals a strong positive correlation of 0.773 between the Fed and ECB interest rates. This indicates that the rates tend to move in the same direction, reflecting synchronized economic policies to some extent. However, when examining the YoY percentage changes, the correlation drops to -0.160, suggesting that the rate changes do not move in tandem on an annual basis.

The Fed Funds rate is higher than the ECB rate approximately 75.16% of the time. This consistent difference underscores the more aggressive monetary policy stance often taken by the Federal Reserve compared to the ECB. It also suggests that we should not read too much into the ECB’s decision to cut interest rates.

Weak Leading Indicators

Despite the strong correlation in raw rates, changes in ECB rates do not serve as a reliable leading indicator for changes in Fed rates, and vice versa. This independence in rate changes suggests that local economic conditions and policy decisions significantly influence the timing and magnitude of rate adjustments by the two central banks.

This independence is crucial for real estate investors and stakeholders to understand. For instance, just because the ECB cuts rates does not imply that the Fed will follow suit. This was evident in several instances where the ECB rate was consistently below the Fed Funds.

Implications for Apartment Values

The weak correlation in YoY changes and the independence in rate-setting decisions between the Fed and ECB imply that apartment values may still face downward pressure. Historically, changes in interest rates have been a significant factor influencing real estate markets. The current economic conditions, characterized by lower transaction volumes and the reluctance of property owners to sell at reduced prices, suggest that we have not yet reached the bottom in apartment values.

Using interest rates as an indicator, the variability in Fed and ECB policies means that stakeholders should not place too much weight on ECB rate changes to predict Fed actions or the consequent impact on the US real estate market.

Conclusion

The analysis reveals that while there is a strong positive correlation between the Fed and ECB interest rates in raw data, the YoY changes show a weak relationship. This independence in monetary policy actions underscores the complexity of predicting real estate market trends based on interest rate changes alone.

All the best,

Yuri - Your Real Estate Investigator

Credit: Brian Underdahl, Chief Analytics Officer, Nuvo Capital Partners

➤ National Multifamily Report – May 2024

➤ Multifamily Feels Pressure On Loans And Increased Inventory

➤ Multifamily Strategies And What To Expect In H2 2024

➤ Rising Home Prices Sending Rents Higher In Southern California

➤ New Report Shows Dramatic Changes In Austin's Rental Market Despite Construction Boom