What are these rising interest rates going to do to home prices? Will they be affected at all? Let's find out!
Welcome to another REAL ESTATE MARKET UPDATE. I’m Erik Braceland with Braceland Homes here in sunny San Diego, California, where we guarantee the sale and/or purchase of your home. Here on the Braceland Homes Blog we cover topics related to buying and selling residential real estate, and trends happening across the housing market.
Let’s talk about mortgage interest rates. Probably one of the biggest topics that’s going to be talked about, as we go into the new year. Real quick before we start, whenever I'm talking about a rate...and I may say interest rate, mortgage rate, mortgage interest rate...it's all the same thing. I'm simply referring to the rate of interest on a home loan in a general sense.
So, what’s going on with mortgage rates? The overall outlook is that mortgage interest rates are going to rise. I’ll talk about that, but this is a look right now, at the 30-year fixed home loan. If we look at January of 2020, prior to the pandemic, we're knocking on the door of 4 percent. Right now, the average 30-year fixed is 3.1 percent. Many calling for that rise going into next year. I’ll show you what forecasters are saying, but if you were to ask me what’s going to happen with interest rates, I think we’re going to go back to where we were.
This is a historical perspective on mortgage rates. Looking at 2016, ‘17, ‘18, ‘19, four really, I’m going to call them normal years in real estate, and we balanced somewhere between three and a half and five percent. I think we’re heading back there. I think we’re heading back into an environment of much more normal interest rates. We’ve seen some phenomenal mortgage rates over the last year or so. Historically low mortgage rates on a 30-year fixed mortgage loan, and I think we’re going to head back into a time where we were prior to the pandemic. Now you know in the real estate business, many people often ask "what’s the impact of rising mortgage rates on home prices and home sales? And if mortgage rates rise, how will the housing market be impacted?" Well, I went back and took a look at the impact on an environment of rising interest rates on home prices and home sales, so let’s see.
First one. Home prices are slightly impacted by rising mortgage rates. This is a look going all the way back to 2000 and what you see in the line graph there, the yellow and red, is the interest rate, and what you see in the bar graph, the blue and orange, is appreciation or depreciation during the housing crisis. The quick thing I want to point out is, in each rising interest rate environment represented by the red sections of the line, there’s no depreciation. Except during that housing crisis. When you start to look at rising interest rate environments, the first one in 2005 with less appreciation in 2006, but there is still home price appreciation over the previous year, meaning higher home prices. You look at 2012, 2013 and 2014. Again, an environment of rising interest rates, with varying levels of home price appreciation, but all with pretty substantial gains in home price appreciation and rising home prices. The next one, in 2016, 2017 and 2018. We go up and come back down a little bit, but still all with decent home price appreciation. Price appreciation is resistant to rising mortgage rates, meaning home price appreciation doesn't soften just because mortgage rates are rising.
Here’s why. Mark Fleming, sums this up best. “Home price appreciation is resistant to rising mortgage rates, primarily because most sellers would rather withdraw from the market than sell at lower prices, a phenomenon we refer to as downside sticky.” So, somebody is going to say okay, if I can’t get as much for my home, or if my home is not appreciating as fast, we’ll just take it off the market, that’s what's happening there. The other question is home sales, are they impacted by rising mortgage rates?
If we go back, all the way back to 1999, which is what you see in this graphic, we again have mortgage rates in the line graph and home sales in the bar graph. We can see home sales are NOT impacted by rising mortgage rates. Now I won’t walk you through each scenario, but you can see on here, each one of the red bars being rising interest rate environments, and they’re not corresponding with lower home sales. So, if you home sellers wanted to argue that its becoming a bad time to sell your home because interest rates are rising, I'd simply ask, on what information are you basing that opinion? Because when you go back and look at it historically, it just doesn’t prove out.
I want to wrap up with this quote, "Context matters right now for the housing market and certainly for purchase demand. The economy is improving, and millennials continue to age into your prime home buying years in large numbers, so context remains good for the housing market." Real quick for you home buyers, My oldest son is included in this millennial group, and he is super excited to be closing on his first home here in the San Diego housing market. I did help him find the home, and I represented him during the negotiations. It wasn't all good times. We did have to compete against multiple offers. We didn't get a deal on the price because of that. We got very little in seller concessions, and my son has some work to do to get the home up to the standard he'd like it to be at. So, I know it's tough out there for you home buyers, and that's the reality of the housing market still, in many areas of the country, just like here in the San Diego housing market. But you know what? It was still a win for my son. We got the home that he wanted. And he can make it the way he wants it, as time and budget allow. That's the goal, so persevere and don't give up. Get your foot in the door to home ownership now. The context of the housing market remains good for you too. Was it better yesterday? Probably, and I'm sorry you missed out on that. Stop waiting. I think overall, as we look at mortgage interest rates, we can expect an environment of rising interest rates going into next year. I don’t see that affecting the housing market dramatically, but it will cost more for those of you looking to buy a home. I think you should expect that, as we go throughout the next several months and the next year, but leave me a comment below and tell me what you think. Perhaps I'm missing something. Please let me know!
How do you predict mortgage rates will impact the housing market? Will home price appreciation take a hit? What will be the effect of rising mortgage rates on home prices? A lot to consider for sure. Leave me a comment below and tell me what you think.
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