The Impact of Increasing Mortgage Rates on Prices
Many pundits are warning that there will be a drop in real estate values because mortgage rates are beginning to increase. The logic makes sense. However, history shows that increasing rates have not negatively impacted home values in the past.
Four times over the last 30 years mortgage interest rates have dramatically increased. Here is the impact the increases had on home values at the time:
Dates |
Mortgage Rate |
Home Values |
| May ‘83 – July ‘84 |
12.63 – 14.67 |
+ 6.6% |
| March – Oct ‘87 |
9.04 – 11.26 |
+ 5.2% |
| Oct ’93 – Dec ‘94 |
6.83 – 9.2 |
+ 1.2% |
| April ’99 -May 2000 |
6.92 – 8.52 |
+ 10.9% |
Perhaps the impact of increasing rates on future home prices won’t be as dramatic as some are predicting.
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Actually, rising prices in a rising interest rate environment makes perfect logical sense. Rising rates are indicative of increasing inflation, which causes commodity prices (i.e. home construction materials, wages, etc…) to rise as well. As new construction becomes more expensive to build, price increases are passed directly on to the consumer. This affects not only the price of new construction, but also pulls the prices of resales up along with it.
Since we have a combination of pent up demand and an inventory shortage, demand for new housing is somewhat inelastic. Therefore it will take a fairly significant increase in prices to create a drop in demand, which is consistent with history.
Great analysis Cliff.