What will happen to housing if mortgage rates go up?

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When referring to interest rates, what is going down should ultimately go up.

Interest rates have started an upward trend towards stable levels. This could be troublesome for housing prices.

As the housing market collapsed in 2007, the response from the Federal Reserve was to push borrowing rates to record lows.

Lowering interest rates made it more affordable for buyers to purchase a new home. This assisted the housing market during a time of uncertainty.

A fundamental principle in real estate involves the correlation between housing prices to interest rates.  The belief, supported by homeowners, is that a rise in mortgage rates will lead to falling home prices. This holds true because overtime those houses will become more expensive.

The issue with this mindset is that it’s simply untrue. In fact, there is no real correlation between housing prices and interest rates.

Assuming interest rates remain at stable levels, the cost associated to purchasing a home will also increase. That might apply pressure on housing prices, which have surged back up by over 50% since crashing out in 2012.

There are two factors responsible for computing interest rates on a mortgage, bond, and other long term debts: expectations on inflation and economic growth.

Together they fix the supply and demand for credit. Rising mortgage rates only happen when people are confident about purchasing a home: inflation is increasing housing prices, and the workforce is growing.

A higher demand for homes will push housing prices even further despite increasing mortgage rates.

Something to consider is that home builders have profited from lower rates. They have been more equipped to finance property purchases affordably.

This provided them with more reach to develop properties. Assuming debt will require more expenses, they will need to be more conservative about which developments to start.

Being conservative in this market can negatively impact their share prices.

A slight upsurge in the federal funds rate is already considered into mortgage rates.

A 30 year fixed rate conforming loan has had its average rate rise from 3.75% to 3.92% over the past four weeks according to Freddie Mac.

Measuring the total impact of interest rates on housing is almost impossible. Home prices are affected by so many things in the market.

A report published by the Fed of San Francisco in August estimated the impact of a 1% increase in the short term rate relative to mortgage rates and home prices.

Income is rising and future homeowners need to adjust by partitioning a share of their income towards housing.

Prospective home buyers may also use their saving as a last resort, People on the move from one home to the other will benefit from rising prices on existing homes.

Borrowers have slowly eased on their borrowing terms, though there is far more restriction when compared to the last housing boom.

A limit on home inventory is one of the reasons that prices have been increasing at a quicker rate than wages.

Increasing interest rates may constrain inventory more as people are unwilling to trade up and giveaway their low interest rates.

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Martin - Head of Real Estate and Finance at RateTake
Martin is Head of Real Estate and Finance division at RateTake. He creates content that helps people understand and make the right decisions for their financial future.
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ratetake

Martin is Head of Real Estate and Finance division at RateTake. He creates content that helps people understand and make the right decisions for their financial future.