Will Increasing Mortgage Rates Impact Home Prices?
There has been some discussion recently on home prices in relation to mortgage rates. Both are important factors to consider when buying a home, as the interest rate you lock in at could save you thousands over the long run.
Some believe that if there’s a rapid rise of mortgage rates, home prices should decrease. This theory is typically discussed by future home buyers, and it makes sense - as a buyer, you would like to think if you are paying higher rates on your mortgage, you should see a decrease in cost to make up for it. Contrary to this belief, a recent study by the John Burns Real Estate Consulting found that mortgage rates themselves actually have very little impact on home values. They studied 10 different instances over the past 40 years where interest rates increased, proving that home values weren’t particularly affected.
So, the question is, if mortgage rates don’t affect home values, what does?
Interestingly enough, there is a link between rising rates and rising home values. They’re both driven by the same motor - a thriving economy. When the economy does well, so do the people living in it. They earn more income and, coincidentally, are more capable of purchasing a home. The more demand there is for homes in an area, the more buyers will be forced to pay top dollar for the home that they want. If there are more buyers purchasing, there will also be more demand for lending and mortgages to pay for those homes. More demand means less availability of funds and, you guessed it, increased mortgage rates.
So what does this mean for future home buyers? Rates rising could actually be a sign of a thriving economy, which signals a great time to buy a home. Rather than worrying about predictions of rising rates, buyers should take advantage of low rates and trust that even if those rates increase, studies have shown that there isn’t a huge relationship between them and home values. Besides, real estate historically shows 3% returns, and is regarded as a pretty safe investment, so investors should trust the long run market.
Check out some of our Snohomish County real estate market reports here!
Also related: What does it take to get a mortgage in 2018?
The Bottom Line
As the economy progresses and strengthens, mortgage rates and home prices will fluctuate. It is a misconception as rates increase, home prices will decrease. Advances in the economy have shown that rates and home prices are more likely to increase together.
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