Disclaimer: I am not an economist. I don't play an economist on TV. Or on this blog. Feedback from actual economists, or accountants, or financial analysts, or wise guys is welcome:
scott@hhtdy.com
So, are home prices going up because mortgage interest rates are going down?
Maybe yes AND no?
Yes...
- Lower mortgage interest rates allow more buyers to qualify to buy homes which increase demand, which can drive prices higher.
- Lower mortgage interest rates allow buyers to pay more without much (or any) impact on their monthly payment, which can drive prices higher.
No...
- My experience has not been that buyers max out their housing budget based on a mortgage payment. If they can afford a $1500 mortgage payment, I don't typically see them deciding to buy a more expensive home simply because low mortgage interest rates allow them to do so. Home buying decisions are often guided more by what they want to buy, not by trying to max out their purchasing power. In fact, in this low interest rate environment the most common response I am hearing from buyers when I ask them about their price range is: "well, the bank says I can spend $X but I only want to spend $Y."
- There doesn't seem to be any other time during the past 20 years other than 2018 through 2020 where we have seen this type of inverse correlation (one goes up, the other goes down, or vice versa) between mortgage interest rates and home prices.
- The last time we saw a significant increase in home prices (2003-2006) it certainly was not caused by interest rates falling.
So What...
- I don't think that interest rates alone are fueling the rapidly increasing home prices we have seen in our local market over the past few years.
- If (actually, when) mortgage interest rates start to meaningfully rise, I don't think that we will necessarily see an equivalent decline in home prices. The rise in prices could slow down or flatten out, but I don't expect that prices will necessarily start declining just because mortgage rates are rising.
Why...
- Why did I bring this up? I greatly enjoy the news coverage over at The Citizen (you should read it too!) and I especially enjoy whenever there are articles about real estate. I particularly enjoyed this recent article about housing prices and interest rates, which is what prompted me to see if I could find other times when there was an inverse correlation between prices and mortgage interest rates.
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