While we were together with a group of friends recently, I was asked what I thought to be a really interesting question. The question had to do with mortgage rates relationship to home prices. Considering mortgage rates have been on the rise, Brian wanted to know if those rising mortgage rates would negatively impact home prices. Do they have an inverse relationship with one another?

If you’ve ever wondered the same thing watch the following video, or continue reading below, to learn more.

The simple answer to the question is no, mortgage rates don’t directly impact home prices, but they are a piece of the puzzle.

The price of any good or service is directly related to supply vs demand. We’ve clearly seen this over the past 18 months. As demand for homes has increased, and supply has decreased, we’ve seen home price appreciation reach levels in excess of 20% per year in most areas of the country. (Here’s a blog post I wrote about supply and demand earlier this year)

Mortgage rates can indirectly impact demand because rising mortgage rates coupled with rising home prices make homes less affordable, which could put downward pressure on demand. However, I think we have a ways to go before we see that because, even though they are rising, mortgage rates are still very low from a historical perspective.

If we take a look at what mortgage rates have done since January 2020, prior to the pandemic, we can see that we still have a ways to go before we get back those rates, especially in a stable rate environment, and demand for homes was very strong then.

Mortgage rates to start 2020 were 3.71%, and besides the spike we saw when the pandemic hit, trended down all year to the lowest 30yr fixed rate ever seen of 2.65% at the beginning of 2021. As of this writing rates for a 30yr conventional/conforming loan are approximately 3.10%

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If we compare these mortgage rates with what we experienced going back to 2016, you will see that rates today, even though rising, are much lower than the rate environment between 2016 and 2020, and those were all very were very strong years for the real estate market

Home prices appreciated in all of those years but at a slower pace than we experienced this past year.

You might recall from my November 2021 Real Estate Market Update that the experts are expecting home prices to continue appreciating in 2022, but at a more moderated pace, which is a good thing.

Fannie Mae, Freddie Mac, the Mortgage Bankers Association, and the National Association of Realtors, all expect mortgages rates to continue rising in 2022 before reaching approximately 3.7% in the 4th quarter, which would be comparable to where rates ended 2019.

What Does This Mean for Home Prices

The following graph, going back to the year 2000, tracks mortgage rates (yellow line) and home price appreciation (bars on the graph).

Except for the housing crash (orange bars), which saw depreciating home prices in a falling mortgage rate environment, home prices have continued to appreciate as mortgage rates rose, but at a slower pace.

If we focus on the years following the crash, home prices continued to rise at nearly 10% in 2013 even though mortgage rates were rising, only to see the pace of appreciation decline in 2014. We see the same pattern again in 2017 and 2018.

The real question here is what is going to happen to demand?

The definition of home changed during the pandemic as more and more people desired more space and privacy, both for health reasons and necessity with remote work becoming more normal. In addition, Millennials, the largest generation, are currently entering prime home-buying years.

With this in mind, relief is more likely to come from changes in the supply side of the equation. New home builders are on pace to build approximately 1.6 million new homes this year, the highest annual level since 2006. As more new product becomes available more current homeowners are expected to list their homes for sale as the fear of not having anywhere to move to will ease.

Bottom Line

While nobody knows for sure what will happen, given concerns about inflation and a new virus strain create an element of uncertainty, but one thing to point out is that rising rates are generally a sign of an improving economy.

Currently, I still believe that the 2022 housing market will remain strong, but do feel that a sense of normalcy will return as the era of bidding wars and multiple offers on every home continues to moderate. As such, while homes will continue to appreciate in 2022, it will be at a slower pace than we saw earlier this year.

Here in Frisco, TX, and also in Temecula, CA, we have already seen the median price of new listings reflect a much slower pace of appreciation.

If you have additional questions or a specific situation you would like to discuss in more detail, please schedule a call as I’d be happy to provide additional information so that you can make the best decision for you and your family.