Recently, Freddie Mac released a report titled Nowhere to go but up? How increasing mortgage rates could affect housing. Their findings discussed how the projected rise in interest rates could affect the housing market.

It seems almost every day we are discussing the rising rates with potential home buyers and sellers. A question of theirs is whether the rising rates will lead to falling home prices. How would this happen? Every step-increase in interest rates cuts some part of the buyer pool out of the market. When there are fewer buyers in the market, there is less overall demand for homes, which can theoretically lead to a fall in home prices.

However, the report from Freddie Mac pointed out how supply is also affected by rising interest rates:

“For current homeowners, the decision to buy a new home is typically linked to their decision to sell their current home… Because of this link, the financing costs of the existing mortgage are part of the homeowner’s decision of whether and when to move. 

Once financing costs for a new mortgage rise above the rate borrowers are paying for their current mortgage, borrowers would have to give up below-market financing to sell their home. 

Instead, they may choose to delay both the sale of their existing home and the purchase of a new home to maintain the advantageous financing.”

The report concluded that home values are not adversely impacted by rising interest rates:

“While there is a drop in the demand for homes, there is an associated drop in the supply of homes from the link between the selling and buying decisions. As both supply and demand move together in this way they have offsetting effects on price — lower demand decreases price and lower supply increases price."

The National House Price Index, an indicator many experts use in predicting shifts in the housing market is...

“…unresponsive to movements in interest rates. In the current housing market, the driving force behind the increase in prices is a low supply of both new and existing homes combined with historically low rates. As mortgage rates increase, the demand for home purchases will likely remain strong relative to the constrained supply and continue to put upward pressure on home prices.”  


See the below chart, courtesy of Keeping Current Matters, which shows the previous six times rates rose and how it affected home prices.

What's the Bottom Line?

Don't let the projected rising rates put your decision to buy a home on hold just because you may think home prices will fall. We feel home prices may begin to plateau (or at least slow their high appreciation), but the chances of falling home prices overall is very slim.


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