Soaring home prices in Las Vegas and across the country will have ramifications for years to come.

Start by understanding why prices are skyrocketing. In August, the median cost of previously owned single-family homes in Las Vegas was $ 405,000. In February 2015, it was $ 205,000. As of February 2019, it was less than $ 300,000.

There are many factors that go into house prices, but one of the most important is the mortgage rate. In February 2019, the 30-year mortgage rate was around 4.4%. Since last week, it is below 2.9%.

Those 1.5 percentage points make a huge difference over decades of mortgage payments. The monthly payment on a 30-year $ 300,000 loan at an interest rate of 4.4% is $ 1,500. That’s a higher monthly payment than you would get with a 30-year, $ 360,000 loan at 2.9% interest.

No wonder house prices have risen so quickly.

It would be one thing if low interest rates were the product of free markets. But the Federal Reserve heavily influences mortgage rates through tools like the Federal Funds Rate, the interest rate that banks pay each other for short-term loans in order to meet reserve requirements. The higher the federal funds rate, the higher the mortgage rates will be.

In February 2019, the effective federal funds rate was 2.4%. Last week it was below 0.1% and has been around that level since the end of March 2020. Members of the Federal Reserve recently said they see interest rates rise in 2022. This is necessary for fight against runaway inflation.

Higher interest rates will lead to higher mortgage rates. If 30-year mortgage rates return to 4.4%, expect homes to now be listed at $ 360,000 priced closer to $ 300,000. Obviously, other factors could offset this decline, especially if Las Vegas continues to grow.

But a federal policy that artificially inflates home prices should sound the alarm bells, especially in Las Vegas. A similar scenario did not end as well in the mid-2000s.

High house prices also offer a useful perspective on other policy issues. For example, if you’ve owned a home in the Las Vegas area since February 2019, your home’s value has likely increased by over $ 100,000. If you’ve owned it since 2015, your earning is probably $ 200,000 or more.

Should the government impose this gain on you? Of course not. It is a saving of paper. You haven’t earned any income from it – and you won’t earn any income from it unless you sell your home. You might be richer, but your wealth hasn’t changed your income.

So why should the “rich” be taxed on their wealth? Their homes and stocks are worth more, but the principle remains the same. Until they sell their assets, their wealth is not income. Ultimately, wealth tax proposals, such as the one pushed by Senator Bernie Sanders, are based on envy, not good economics.

Another question. Does your bank have to share your capital gains? Home prices in Las Vegas have increased 22.4% in the past year. You are probably paying your bank an interest rate of less than 5%.

How is that fair? Because you and the bank signed a contract. As long as you make your payments, the bank cannot share your equity gains.

So what if – or when – the market corrects 20%? After the 2008 real estate crash, many people, including elected officials, wanted to interfere with these contracts on behalf of delinquent owners. If a contract is sacrosanct when prices rise, it should be sacrosanct when prices fall.

The principles in place when the market is hot should be the principles followed when the market is declining.

Victor Joecks’ column appears in the Opinion section every Sunday, Wednesday and Friday. Contact him at [email protected] or 702-383-4698. Follow @victorjoecks on Twitter.