Will Increasing Mortgage Rates Impact Home Prices?
There has been some discussion recently on home prices in relation to mortgage rates. Some believe if there is a rapid rise of mortgage rates, home prices should decrease. Logically it makes the most sense for the price of the house to drop when interest rates are rising, but this is not always the case.
This theory of home prices decreasing is typically discussed by future home buyers. As a buyer you would like to think if you are paying higher rates on your mortgage, you should be able to see a decrease in cost somewhere else. Unfortunately, these rates are rising because the economy is in better shape. As the economy succeeds, incomes rise, rates go up, as well as the price of the home.
A recent study by the John Burns Real Estate Consulting found mortgage rates have very little impact on the cost of the home. The housing market and price increases are affected by things like job growth in the area and rising wages. Coincidentally, these same factors are causing the rise in the mortgage rates since people can afford to take out more.
Bottom Line
As the economy progresses and strengthens, mortgage rates and home prices will fluctuate. It is a misconception as rates increase, home prices will decrease. Advances in the economy have shown that rates and home prices are more likely to increase together.
Frequently Asked Questions
- Do home prices decrease when mortgage rates increase?
- Counterintuitively, no—not always. While it seems logical that higher rates should lower prices, a study by John Burns Real Estate Consulting found that mortgage rates have very little impact on home costs. In fact, rates and prices often rise together because both are driven by a stronger economy with job growth and rising wages.
- Why do mortgage rates and home prices tend to rise at the same time?
- Both mortgage rates and home prices increase during periods of economic strength. When the economy improves, job growth accelerates and incomes rise, allowing people to afford larger mortgages and homes. These same economic factors cause lenders to raise mortgage rates, creating a correlated increase in both.
- What factors actually drive home price increases instead of mortgage rates?
- Home prices are primarily affected by local job growth and rising wages rather than mortgage rates themselves. These economic fundamentals determine whether buyers can afford homes and take out larger loans, which in turn influences both property values and the rates lenders charge.