Ask the Experts: Will Home Prices Fall as Mortgage Rates Rise?

Q.  Will home prices fall as mortgage rates rise?

A.    All indicators suggest that home prices will not fall as mortgage rates climb through the end of this year, it’s the law of supply and demand that is driving increasing home prices. The best time to sell  anything is when demand is high, and supply is low. As the number of homes for sale increases and home value appreciation slows, we expect the market to meaningfully swing in favor of    buyers within the next two to three years Real Estate is a cyclical market– it’s  interesting to watch the dynamics of the market. What we see is prices rise, home sales slow down, prices weaken and home sales pick back up. It’s the way a housing market is supposed to behave in a normal  environment. But it’s been so long since we’ve seen a normal environment that we forget how it’s  supposed to work.  Mortgage  interest rates have increased by more than half of a point since the beginning of the year. They are projected to increase by an  additional half of a point by year’s end. Because of this increase in rates, you are guessing that home prices will  depreciate. Let’s take a look at the data.  

Mark Fleming, First American’s Chief Economist: “Understanding the resiliency of the housing market in a rising  mortgage rate  environment puts the likely rise in mortgage rates into perspective – they are unlikely to materially impact the  housing market… The driving force behind the increase are healthy economic conditions…The healthy economy encourages more homeownership demand and spurs household income growth, which increases consumer house-buying power. Mortgage rates are on the rise because of a stronger economy and our housing market is well positioned to adapt.” Terry Loebs, Founder of Pulsenomics: “Constrained home supply, persistent demand, very low unemployment, and steady economic growth have given a jolt to the  near-term outlook for U.S. home prices. These conditions are overshadowing concerns that mortgage rate increases  expected this year might quash the  appetite of prospective home buyers.” Laurie Goodman, Codirector of the Housing Finance Policy Center at the Urban Institute: “Higher interest rates are generally positive for home prices, despite decreasing affordability…There were only three periods of        prolonged higher rates in 1994, 2000, and the ‘taper tantrum’ in 2013. In each period, home price appreciation was robust.”

Industry reports are also calling for substantial home price appreciation this year. Here are three examples:   The Home Price Expectation Survey says that prices will appreciate by 5.8% this year.  The Freddie Mac Outlook Report is looking for home prices to appreciate by around 7% in 2018. The CoreLogic HPI Forecast indicates that home prices will increase by 5.2% on a year-over-year basis.  As Freddie Mac reported earlier this year in their Insights Report, “Nowhere to go but up? How increasing mortgage rates could affect housing,” “As mortgage rates increase, the demand for home purchases will likely remain strong relative to the  constrained supply and continue to put upward pressure on home prices.”

If you are currently in a house that no longer fits your needs and you are looking to step into a different home, now’s the time to list your house for sale and make your dreams come true. Call us today  714.343.9294 and  visit stovallteam.                                                                               

Sources:  National Association of Realtors, First American, Housing Finance Development Policy Center at Urban Institute, Pulsenomics, CoreLogic, Freddie Mac, Micah Stovall