If you look at data for the housing market over time, you’ll notice that home prices and mortgage interest rates usually work like they’re on opposite ends of a seesaw.
Typically, when mortgage interest rates are at their lowest, it usually means home prices are on a steady incline to towards their peak. And when rates are high, it usually signals that home prices are low. When you consider the reasoning behind these rises and swoons, it’s a simple case of supply and demand.
When interest rates are high, less people can afford to buy homes, and the high mortgage payments make owning a home less of an attractive proposition. Less buyers and more desperate sellers equates to further downward pressure on sale prices. Furthermore, interest rates may be high due to Fed economic policies to try and curb inflation, or because of other economic volatility.
On the other side of our seesaw, we have times when interest rates are low. During these periods, home buying is most attractive, with more people trying to buy their first home, sell their existing home and buy a bigger and nicer one, and investors buying rental properties or even vacation homes.
Realize that these conditions don’t exist in a static environment – the seesaw is never still or perfectly balanced. When rates are low, more people buy, but that increased demand puts upwards pressure on home prices until eventually, over years, they reach their apex and a correction or slowdown ensues. Likewise, interest rates don’t stay high forever and incrementally are raised or lowered depending on the condition of the economy and other influences. When rates are high, less people want to buy a home but when prices bottom out, real estate becomes an irresistible investment again, and properties get scooped up in full force.
Of course this is an oversimplification and there are many other factors at play, but the point is that this balance of rates and prices is constantly in a gentle (or not-so-gentle, as during crashes!) flux. Therefore, a roller coaster analogy may be more accurate, as these up and down cycles of interest rates and home prices usually take about 5-7 years to exhaust, their graph lines meeting and crossing somewhere in the middle.
All of this brings me to my point today – the relationship between home prices and interest rates when you’re purchasing real estate.
Realize that when one is high, the other is usually low, or, as we’ve learned – headed in that direction over a long-term trend. When rates are at rock bottom, so many people are buying that hot demand – as well as usually a healthy economy – drives prices upwards quickly. Conversely, when rates rise, buying slow and home prices first stop appreciating as quickly, then go flat, and possibly even correct downwards.
As you may remember when you were on a seesaw way back in grade school, they are both vital to achieving that proper balance.
There’s nothing “wrong” or “scary” about this seesaw of prices and rates, except maybe one when moves way too quickly. That was the case in 2007 starting with the banks imploding and our economy all-but collapsing in a short span. Soon, rates bottomed out and a glut of foreclosures and low home buying demand led to freefalling values.
But even that colossal crash and subsequent “unicorn” market – extremely rare cases when both rates and prices are low or vice versa – led to unprecedented opportunities. IF you could qualify for a loan, IF you had a great credit score and IF you had significant assets (as many bottom-of-the-market homes were being gobbled up by investors paying cash), you ended up getting the deal of a lifetime.
The reluctant buyer will take any excuse NOT to buy, using rising interest or especially escalating home prices as their reason not to buy, but keep renting instead. Their analysis leads to paralysis, as they say, and cycle after cycle goes by with them still not owning a home, but paying every month to make their landlord wealthier.
Remember that real estate is not bought or sold according to charts, statistics, and on a national scale, but one house at a time in one neighborhood. That means there are fantastic opportunities and great investments to be had in any market and under any economic conditions, no matter what rates and prices are doing.
If you have to pay a little more for a house because values have escalated in that area, you’re probably getting a very low rate. If rates go up (as they will soon), home price appreciation may slow down and then even correct downwards a bit, so you’ll end up buying for a better price.
What you’ll always want to look for is a balance of price and interest rate, as well as other factors like credit and lending standards, etc., so your home purchase will be a net positive over time.
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Where are we on that real estate and interest rate “seesaw?’ How can that affect you and, most importantly, how can you benefit? Contact us if you’d like to discuss any of these topics!