Will the recent rise in mortgage interest rates have an effect on the housing market? Well the answer may surprise you. No. There is NO inverse correlation between interest rates and home prices. Historically housing prices have gone up when interest rates increased and they have gone up when interest rates were cut.
Let’s look at some of the scenarios. According to Michael Orr, Cromford Report, from 1989 to 1991 home prices fell about 10%, but during this same period mortgage interest rates fell from about 10% to 8.5%. Between June 2006 and Aug 2011 home prices spiraled downward while interest rates dropped from about 6.75% to 4.5%. In both of these situations, prices dropped just as interest rates fell.
The only time we see a fall in home prices is when supply outstrips demand. What do you know? In this complicated world we live in there are still some tried and true facts …it’s all about supply and demand.
From August 2011 to June 2013 interest rates have been down to about 3.5 to 4%. Home prices have seen a strong increase during this time period but the demand for homes is just up slightly. In other words, the very attractive interest rates did not bring a huge influx of buyers into the market…demand was up a little bit, but not a lot. What drove home prices up? The lack of supply in relation to demand.
So what effect will the rise in mortgage rates have on the housing market? Well believe it or not, it will create a sense of urgency and we could see more home buyers/sellers enter the market before it rises any higher. We have seen it happen many times before. So if you are thinking of selling, this is a great time to get into the market…there will still be plenty of buyers out there.