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Do Rising Mortgage Rates Trigger Lower House Prices?

March 27th, 2018 6:54 AM by Jackie A. Graves, President

If you’re a homebuyer and are keeping a close eye on rising mortgage rates, you may be wondering if higher rates will lead to a drop in home prices.

You may be thinking: If mortgage rates rise, prices of homes for sale must fall because otherwise those homes will become less affordable, right? However, there’s no strong relationship between house prices and interest rates.

Generally, mortgage rates tend to rise when the economy is growing, the job market is healthy and wages are rising. In this environment, people can afford more and are more willing to take out a larger mortgage. Meanwhile, factors like inventory and cost of construction drive housing prices.

Mortgage rates indirectly affect home sales

“A slow and steady rise in mortgage rates alone, such as what we’re seeing now, won’t be enough to impact housing prices,” says Adam DeSanctis, national media manager at National Association of Realtors.

Most people, especially in a strong economy where wages are on the rise, can absorb a few percentage points over time, DeSanctis says. On the other hand, if rates shoot up like they did in 2013, then that could be enough to move the needle on home prices.

“All things considered, if you have rising mortgage rates over a longer period of then you will see a weaker demand, especially in the lower end of the market. In that case, you could see price appreciation moderate, which we do think will happen this year,” DeSanctis says.

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Increased inventory can offset rising rates

If you’re looking for a home on the lower end of the market, then you have likely faced an all-too-common problem: a lack of houses for sale. This is because entry-level residential construction is down. As building materials increase in price, so does the cost of construction. Builders can make up their profits by building high-end homes, thus the lack of affordable housing.

“If you have rising mortgage rates but inventory conditions are improving to the point where you have less competition then that would moderate price growth. This is something we’re hopeful for, especially for first-time buyers where that lower end of the market is where demand is the strongest right now and it’s also where there are the least amount of homes for sale,” DeSanctis says.

Increased tariffs on building materials, such as the ones President Trump recently announced, are potential roadblocks for entry-level construction growth.

Housing prices outpace wages

Home prices were up 5.9% nationally last month and have increased in every major region. Although, wages are increasing, they’re above 3 percent growth year over year, they’re still lagging behind the cost of housing. For example, home prices in the West are up 9.6 percent, followed by the South with 5.4 percent, the Midwest with 4.5 percent and the Northeast with 3.6 percent increases.

“You’re still seeing home prices exceed wage growth and in many markets at least double or triple the pace of wages,” DeSanctis says.

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Posted by Jackie A. Graves, President on March 27th, 2018 6:54 AM

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