What Impact Do Higher Mortgage Rates Have On Housing Prices?

Friday February 23, 2018 by The Mettle Group

Mortgage interest rates have risen by nearly one half percent thus far in 2018, most projections are for a five percent 30 year fixed rate by the end of the year and I personally would not be surprised to see it above that.

WHY are rates moving higher after 30 years of lower and lower interest rates?

As I have written about before, higher mortgage rates are a near certainty due to the fact inflation is ticking up faster than anticipated and the Federal Reserve has ended their QE (Quantitative Easing) program and have begun unwinding their $4,500,000,000,000.00 (yes friends $4.5 TRILLION) in mortgage backed securities and U.S. Treasury bonds. In laymen terms, the Fed is no longer manipulating the market by buying these assets and forcing long term interest rates lower.

With the probability for higher rates, I wanted to know what can history teach us about their impact on home values.

Many quickly jump to the conclusion that an increase in mortgage rates will have a detrimental impact on real estate prices as fewer buyers will be able to qualify for a loan. This seems logical; if there is less demand for housing then prices will drop.
However, when the economy is healthy and growing the exact opposite happens. History shows us that when rates start to rise, those living at home, renting, or those contemplating moving up, develop a case of FOMO (fear of missing out) and make the decision to buy before rates increase even more.
If you look at the average 30 year fixed rate going back to 1965, you will see we’ve averaged something like seven and a half percent. Pretty much everyone will agree today’s four to five percent is much better than seven percent.
Let’s look at home prices the last four times mortgage rates increased dramatically.

In each case, home prices APPRECIATED and did not depreciate. No one is projecting as dramatic an increase in rates as the examples above. Most are projecting an increase of approximately one percent by the end of the year.
The last time mortgage rates increased by one percent over a twelve-month period was January 2013 (3.41%) to January 2014 (4.43%). What happened to house prices during that span? They appreciated by nearly ten percent.

Just two weeks ago, Rick Palacios Jr., Director of Research at John Burns Real Estate Consulting explained:

“Mortgage rates have risen 1% or more ten times in the last 43 years, with little impact on home sales and prices when the economy was also strong…Historically, rising confidence, solid job growth, and higher wages have more than offset reduced demand for housing resulting from higher mortgage rates.”

In January of 2013 to 2014 we saw interest rates go from 3.41% to 4.43% but what effect did this have on housing.  In SLC county we still saw prices appreciate.  In that same one year time frame there were over 12,000 single family home sales in Salt Lake County and median price went from $227K to $245K, nearly 8%.  If you consider the average price vs. median you saw an even greater rise at nearly 10%.   Affordable housing saw even stronger appreciation during the rate increase when average prices went up 9% and median price went up 13%!  Historical data shows us that interest rate increases don’t lead to pricing declines.  In fact the opposite has been true for decades. When rates rise, especially in the first few months that they rise most buyers get apprehensive that rates will continue up and so they decide to hurry and purchase.  This causes more of a frenzy in purchasing.  If you are on the fence and waiting for the right time to buy it’s today, not tomorrow, today.

Bottom Line

When mortgage rates increase, history has shown that prices appreciate (and do not depreciate) during that same time span.
If you are interested in moving up or buying your first home, I would love to introduce you to HomeScout:

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Josh Mettle is an industry leading author and mortgage lender, specializing in financing physicians, dentists, CRNAs, and physician assistants.  You can enjoy great physician real estate and mortgage advice here or by visiting his book site.  Josh is also a fourth generation real estate investor, and owns a number of rental homes, apartment units and mortgages.  Josh is dedicated to helping physicians become more financially aware and able; listen to “Physician Financial Success” podcast episodes or download Josh’s latest tips and advice here.

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This entry was posted in Housing, Mortgage, News, Real Estate, Real Estate Investing.
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