Many people think the answer to this questions is an obvious “yes.” In fact, most people think that when interest rates rise, home prices fall. While this seems logical upon first glance, it’s more like incomplete logic. The fact is that home prices and interest rates tend to stick together on the upward or downward trend.
One reason people may think higher interest rates would lead to lower home prices is the assumption that fewer people would be able to afford and qualify for mortgage loans at a higher interest rate. But history tells us otherwise. Traditionally, home prices actually rose in the same period in which interest prices rose. This chart from Forbes paints a clearer picture.
Interest rates are set with two factors in mind: expectations for economic growth and inflation. These two factors then work together to set the supply and demand for credit. So mortgage interest rates only trend upwards when the economy is positive. Inflation bumps up real estate prices when more people are employed and more people are comfortable with making big purchases.
So it’s really supply versus demand. The more people who want to buy a home, the more the demand for homes grows. It’s the increase in demand that increases the home prices.
According to the Cromford Report, there are actually only two instances in the last 50 years in which home prices plummeted, and they were both during periods when interest rates were also moving downward. Home prices are more likely to go down when the supply is more than the demand. As if to demonstrate this point, we are seeing now that homes in the $200,000 price point have a higher demand, and thus prices are increasing for the lower supply available.
While interest rates could have a small negative impact on housing demand levels, they have absolutely no effect on supply. Higher interest rates could also have a negative effect on the number of sales in a market, but not the individual home sale prices in that market.
Although it may be counterintuitive, fluctuating interest rates will not alter your home’s value or the price you can list it for. For a truer picture of the real estate market, watch the demand for a home in your price range and see what other supply is available. The old supply and demand rule will always set the course.
Wondering about your home’s value and the effect of current demand levels? Contact the Matheson Team for expert info on the market and Arizona golf homes.
Realtor | Founder
The Matheson Team – RE/MAX Fine Properties
21000 N. Pima Rd., #100, Scottsdale, AZ 85255