Predicting housing prices according to expected future interest rate

Abstract

In this article, I present a theoretical model for predicting future housing prices as a function of the expected future interest rate, housing depreciation and rent rate. Focusing on the notion of arbitrage, where the returns on investing in housing is equal to the return on bonds, I forecast housing prices in the US as a function of the expected future interest rate on corporate bonds graded at categories AAA or AA. I get that a change in the expected future bond yield will lead to a change in future housing prices.