The potential for home prices to fall has worried buyers, sellers, and current homeowners ever since the monetary authorities started raising interest rates to fight inflation. We have seen a dip, but nothing like what you’d expect from the large jump in mortgage rates from below 3% to above 7%. And since January of this year, home prices have actually appreciated! For the prospective homebuyers among you, this is frustrating. For the existing homeowners, this is a relief. What’s going on? Mortgage rates are important to home prices. But as the late great comedian Mitch Hedberg once said of his attempt to make homemade Sprite with just lemons and limes: “There’s more to it than that”. What comes next? Bubble, crash, or stability? Here’s my perspective.
Correlation Confusion: Home Prices and Interest Rates
Mathematically, the conventional wisdom is correct. When mortgage rates rise, home prices tend to fall. There is a negative correlation in the data. But there have been periods, one of them lasting decades, when the relationship has been totally reversed.
From 1950 through 1981, home prices kept going up despite rising interest rates:
Then during the Great Financial Crisis, home prices peaked in 2006 and crashed through 2012 despite interest rates falling:
Here’s the likely explanation:
- A home is a “real” asset, meaning it’s a physical piece of property—and their values tend to keep up with inflation. So if interest rates are rising because of inflation (like today and back in the 1970s/early 80s), home values can appreciate despite higher mortgage payments.
- Conversely, in a deflationary recession like 2008, many people find they can’t afford the home they thought they could and all try to sell at the same time depressing prices. Governments usually try to lower interest rates to stimulate the economy. But if conditions are bad enough, lower rates can’t offset the massive supply of homes suddenly on the market, at least in the short term.
The Hesperian View
Paradoxically, homes might not become cheaper until interest rates fall (not rise). Consider this: When the monetary authorities eventually lower interest rates (which are now well over inflation), at first, more people may be induced to buy because of better mortgage affordability (higher demand). But even more people currently “stuck in their homes” with low mortgage rates might try to sell (higher supply). Then if interest rates start falling further because of economic trouble, and layoffs accelerate, we might see additional forced selling (even higher supply). A 3% mortgage can’t help you if you have no income at all. If home prices/rates fall … that’s when we strike:
- For homebuyers, this would be the perfect scenario (and one you may be waiting for): Cheaper homes, wider selection, and lower mortgage rates! When the time comes, I’ll help you double-check the financial feasibility of your home purchase and guide you through the buying process along with your real estate and loan professionals.
- If you’re a current homeowner with a high mortgage rate, it may be time to refi. I’ll connect you with mortgage specialists and review your options. And importantly, I’ll remind you to temporarily ignore the value of your home. Unless you’re trying to move, it doesn’t mean anything to you! Your home was a long-term purchase and only an investment in part. Look at it as a great chance to drop your mortgage payment. Home prices should recover in time.
The important thing is: Whatever happens, you have a personal wealth manager backing you up, watching out for you, and guiding you along the way. If you have any questions or concerns about your home, homebuying goal, or any financial topic at all, let’s talk it over.
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