The resulting REE real house price dynamics from unexpected changes in the interest rate are illustrated by the upper line in figure 6.25 The figure reveals that RE imply that house price changes occur simultaneously with unanticipated changes in real interest rates.26 For the US economy, however, one cannot find a close simultaneous association between changes in the real mortgage rates and house prices changes. Mortgage rates, for example, stayed approximately constant between the beginning of 2003 until the end of 2005 (see figure 2) while house prices increased strongly over these two years. Likewise, real mortgage rates were roughly constant over the years 2006–2008, while house prices decreased considerably over these years. Due to this close association with interest rates, house prices under RE do not exhibit the persistence that can be observed for house price fluctuations in the data.
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