Question:
“What do you think the recent interest rate increase will do to home prices?”
Answer:
Great question. Many people are asking me the same question right now.
My economics degree gives me some insight. Economics is ultimately a study in human behavior and how various forces impact that behavior.
So how does increase in rates impact people’s behavior?
Many of my professors would say that given a set of conditions, you apply “X” theory and get a result. Just as I would begin to understand, they would say that if you take the SAME conditions and apply “Y” theory, you get a different, often opposite, result.
Then the question becomes which theory will have the greater impact. That’s the case here.
An increase in rates can create two opposing results:
- Homebuyers’ buying power drops, having a negative impact on home prices.
- Homebuyers are suddenly motivated to buy before rates go up further, having a positive impact on home prices.
My opinion: rate increase will have a negative net impact on home prices.
At the same time, it’s important to remember that mortgage rates are NOT the only thing impacting home values. There’s also jobs, inflation, supply, etc.
So you can’t base your entire prediction of the housing market on the direction of mortgage rates.
