what do you think the effect rising interest rates will have on home prices?

[PAstash]

any ideas are welcome. if you can source your opinions I'll give out hugs.

[mathjak107]

prices are driven more by demand then rates . rates were not low in 2007 and housing boomed. higher rates usually mean a better economy and we typically see better appreciation when the economy is better .

demand tends to pick up when rates start rising as people get motivated more as they figure they better buy now before they can  afford even less house .

there is little correlation between rates and pricing alone unless rates sky rocket

[Drifterrider]

Increasing rates will drive down the price of housing.  People are monthly buyers. They have XXX dollars per month.  What they can buy for XXX dollars is what they will buy.

Will 1/4 of one percent have an immediate impact:  no.  But, look to the 1980s.

[sokoloff]

I agree that rising rates will depress prices. Yes, you need demand to support higher prices, but even more critically, you need buyers to qualify to pay the higher monthly payments to support the sales price and interest rate.

Higher rates take away a lot of that price support, especially on the condo and starter home end of the spectrum (where a higher percentage of buyers are stretching to qualify).

[Dicey]

DH and I will be shopping for another rental this week. Interest rates haven't changed enough to make that much of a difference in price, mortgage payments or rents. Yet.

[Huskie87]

The answer, like most things, is 'it depends'.  In this case, it depends why rates are rising.  If the economy is doing well, economic activity will force inflation to rise, and interest rates will rise accordingly.  In this case, like mathjak says, prices will be more a matter of supply vs. demand.  A strong economy drives job creation and wages rise, this is a positive for real estate.  Now, on the other hand, if rates rise for other reasons...say because interest rates have been artificially depressed by central banks around the world and they decide to try and correct that...then the rise in interest rates is not driven by a rapidly growing economy.  In this case, there are not lots of new jobs created and lots of pay increases.  In this case, the rate rise effects real estate prices just like they affect a bond...rates up, prices down.

In reality, it will be a mix of both and your local community will be impacted by local matters as well.

FWIW...the general rule is REITs generate most of their price returns during stable/declining interest rate environments, while remaining stable or declining during rising interest rate environments.

[mathjak107]

there no evidence that rising rates alone depress housing prices .  none !  heck all of us were happy to have 6% mortgages when we did

the housing boom in 2006 saw rates  more than 50% higher than the recent lows . they were in the 6 range on a 30 year . if  mortgage rates determined home prices we should have been booming all across the country instead of a downturn

[soccerluvof4]

I agree ^ with all the above. And even if rates go up 4 x's next year for a total of 1% they are still ridiculously low historically.

[retired?]

there no evidence that rising rates alone depress housing prices .  none !  heck all of us were happy to have 6% mortgages when we did

the housing boom in 2006 saw rates  more than 50% higher than the recent lows . they were in the 6 range on a 30 year . if  mortgage rates determined home prices we should have been booming all across the country instead of a downturn

I'll play devil's advocate.  I'd guess that the data in the full set in the chart are negatively correlated.  If you look at the middle part of the graph, say 1982 to 2007/8 they are highly negatively correlated.  Re-plot as a scatter plot.

The period of 1980-1982 and the period 2008-now are both periods with great govt interference in interest rate markets.  And, the mortgage market mess was mainly due to lax lending standards due to HUD goals of home-ownership.  Now, lending standards have tightened up.

But, the main argument I'd make is that demand is driven at the entry level, i.e. first time home buyers.  And, as someone pointed out, how much they buy is based on monthly cost vs. income rather than assets (i.e. no large savings for big down payments).  An extra 1% in 30-year rate might raise monthly payments by 10-12%.  Granted, may not be much, but unless incomes grow at a rate that maintains debt-to-income ratios, these borrowers won't qualify for the same amount of house and prices should depress.  If incomes grow faster, then prices could still increase with rate increases, but.......

To me, the chart clearly shows a relationship for most times (when govt isn't strongly involved a la 3 rounds of 'quantitative easing').  No guarantees, but ceteris paribus........