The Effect of Mortgage Rates on Sale Price - It may not be what you think
Real estate is hyper-local. While this true, there are large macro trends that impact real estate markets nationally. Different markets handle these outside pressures differently, which is why it’s important to not only understand individual regions and communities but also larger factors that drive home valuations.
A commonly cited factor impacting housing prices is the mortgage rate. Though these two are inextricably tied, mortgage rates are only one of many factors impacting the value of housing over time. Those who predict that higher mortgage rates on their own will drive housing prices lower are usually wrong.
Other notable factors:
Unemployment
Housing supply
Lending guidelines
Population changes (increase/decrease? changing demographics?)
Rate of new construction
So, just how correlated are housing values to mortgage rates? Less than you might think. Take a look at the chart below, which shows the median sales price of a home sold in the United States vs. the 30-year fixed mortgage average. Since 1970, markets that saw a decrease in the median sales price of a home sold were more likely to have falling interest rates than rising ones.
The only real comparison for the scale of rate hikes we have seen recently are the Fed’s actions in the late 1970’s and early 1980’s to curb inflation. Because of the Fed’s actions and other factors including inflation, mortgage rates rose from 8.65% in 1977 to 18.63% in 1981. Over those 4 years of incredibly high rates, the median sales price of a home in the US rose from $46,300 to $70,400 - that’s just over 52% growth!
This doesn’t mean our current market is primed for huge home price growth - but it does demonstrate the complex relationship between home values and mortgage rates.
Since 1970 nearly every market that’s seen falling housing prices has also seen quickly rising unemployment. The US has experienced 12 recessions since World War II. Each has shared two characteristics - a contraction of economic output, and a rise in unemployment. How today’s labor market ultimately settles out will go a long way toward determining our odds of recession, as well as the possibility of declining housing prices.
Higher mortgage rates disincentivize homeowners who might otherwise become sellers. As of July 31, nearly nine of every 10 first-lien mortgages in the US had an interest rate below 5% and more than two-thirds had a rate below 4%. About 83% of those mortgages are 30-year fixed rates. (Black Knight Inc.).
Homeowners currently holding a mortgage at 3% (or below) are far less likely to sell and take on a new mortgage at a significantly higher rate, constricting the supply of homes for sale, therefore buoying prices.
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