If Mortgage Rates Rise Will Home Prices Drop?

If Mortgage Rates Rise Will Home Prices Drop?

In a recent article published by Freddie Mac stated the impact the projected rise in mortgage rates might have on the housing market. We often assume that an increase in mortgage rates will cause a slow down in real estate purchases, which in turn, may lead to a drop in housing prices. But, prices are usually determined by supply and demand and while rising mortgage rates may slow this demand, they also affect the supply.If Mortgage Rates Rise Will Home Prices Drop?

Most people looking to buy a new home will need to sell their existing one. “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.”

In the Freddie Mac report, prices are not adversely impacted by higher mortgage rates because while there is a drop in the demand for homes, there is also a drop in the supply linking between the buyer and the seller. As both supply and demand move together in this way they have offsetting effects on price.

Right now, the driving force behind the increase in prices is a low supply of both new and existing homes combined with our low-interest rates. As mortgage rates increase, the demand for new homes will still remain strong due to the constrained supply.

It’s interesting to look back over the last few times that mortgage rates increased more than 1%. Home prices actually increased anywhere from 2% to 13% with an increase in mortgage rates. That’s definitely the opposite of what we all assumed what happened. The higher the interest rate the less affordable homes can be and yet prices are still increasing, so the bottom line is waiting to purchase your next home based on the idea that prices may drop because of rising mortgage rates is simply not a smart way to look at it.

If you’ve been considering a refinance or considering selling your home and buying a new one, my advice is not to wait much longer. Home prices will continue to rise as well mortgage rates throughout this year and if buying a new home is in your future, the smart move would be to pull the trigger sooner rather than later. Give me a call today to find out what current rates are available and how quickly you could close.

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