Will Rising Mortgage Rates Further Dampen Home Prices?

The question has been raised by some bloggers as to whether rising mortgage rates, widely predicted, could further dampen home prices. The argument is that rising rates would shrink the pool of eligible buyers, thus weakening demand for homes. If such a linkage comes to pass, it would surely pose a conundrum for buyers: should they wait for prices to go down, or act now before rates go up? It could keep a body sleepless at night.

Tim Ellis over at Seattle Bubble has thoughtfully graphed both rates and prices since 1950, highlighting in yellow two extended periods when rising interest rates preceded falling home prices (see the chart). Over the past 20 years, of course, there has been no such correspondence. I’m not an economist, but I have to wonder if these two historical examples are relevant for us today: every era is different.

I continue to be optmistic that in a few years time, home prices will once again start going up, albeit more slowly, and will do so for the same reason that interest rates will go up: increased economic activity, more people working, more wanting to buy homes. The increased demand for money, and for homes, will put upward pressure on the cost of both.

Given the depth of the recession, we should not be surpised, however, if progress comes slowly, by fits and starts, and with some backsliding along the way, some further, moderate drop in home prices. There will also be different outcomes in different parts of the country, reflecting local conditions.

Tim wrote his piece in response to a reader who reports feeling pressured to buy before rates go up. I’ve always believed, and I’ve always advised buyer clients to this effect, that noone should feel pressured to meet a deadline, be it for the tax credit, or to get a jump on rising interest rates. At the same time, it would be feckless to ignore such issues altogether. The key is to keep these externalties in perspective, and include them with all the other factors — personal and financial — that must go into making such an important decision.

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About Ron Cohen

Retired, I've spent the past few years describing "the life of a pond in words and photographs:" http://atmywindow.com/. Recently I've created a new photo blog devoted to "people and places along my way:" http://www.roncohen.com.
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2 Responses to Will Rising Mortgage Rates Further Dampen Home Prices?

  1. I believe that you are exactly correct in predicting home prices will begin a true modest recovery in about 2 years, but home prices will continue to suffer due to rising mortgage rates, shadow inventory and general affordability issues due to joblessness and general public attitude.

    • Ron Cohen says:

      Thanks for the comment, Grant. I agree that home prices will improve only gradually, for the reasons you cite — shadow inventory, joblessness and the overall state of the economy. I would also add to that list the depressive effect of foreclosures on whole neighborhoods. But I don’t share the assumption that rising mortgage rates will necessarily be a factor. That’s the point I was trying to make in my post. Interest rates and home prices could very well go up in tandem, both buoyed by improving economic activity.

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