Housing Market: Home Sales are the Concern, Not Home Prices

By Heather Munro | Comments

What do realtors and lenders need to know about the housing market as we head into 2017?
Many homeowners are anxious about the idea that future high mortgage rates could make their houses appear less attractive to buyers on the market. If this were true, homeowners would be forced to lower their asking price to meet the demand of buyers. However, historical data on the housing market suggests that sales volume is more important than home prices.

Housing Market: Interest Rates Don’t Always Affect Home Prices

While the theory of home prices dropping in response to rising interest rates is logical, the real market does not behave this way. In the current economy, home prices generally rise even when interest rates increase. According to Doug Duncan, the chief economist for Fannie Mae, this trend was also true during the 1970s.

When mortgage rates climbed to 12 percent in the 1970s, many analysts expected home prices to plummet. In reality, home prices continued to rise. However, the market did respond to the rising interest rates with the number of home sales. The number of homes sold fell dramatically after the spike in mortgage rates.

The United States housing market also experienced this trend after the Great Recession. When mortgage rates increased by 110 points in 2013, home sales declined by 10 percent. Home prices continued to rise during this period.

The Trend Is Explained by the Growing Economy

Growing mortgage rates do not affect home prices for a variety of reasons. First, mortgage rates tend to increase during periods of economic expansion. However, the incomes of consumers increase, and outlooks become more optimistic. Because of this, many homes are purchased at the higher prices. In short, most buyers can simply afford the rising mortgage rates during periods of economic growth.

Mortgage Rates Are Need a Barrier for Many Consumers

While growing incomes can explain how consumers handle high mortgage rates, data suggests that the mortgage rates may not be a large financial constraint. In US metropolitan areas, a change in mortgage rates from 4 to 4.25 percent resulted in homeowners paying an addition 22 dollars per month. This increase does not break budgets.

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