The Impact of Interest Rates on the Housing Market

Mortgage interest rates play a crucial role in determining the health and stability of the housing market

Mortgage interest rates play a crucial role in determining the health and stability of the housing market.

When interest rates are low, more people can afford to buy homes, which often leads to increased demand and a rise in home prices. On the other hand, when interest rates are high, borrowing becomes more expensive, making it harder for people to secure a mortgage and purchase a home. This can result in decreased demand for housing, lower home prices, and a slowdown in the market.

When mortgage interest rates change, a slew of housing market experts surface and make bold claims on how the market will unfold. They cite, as fact, that rising rates mean cooling sales while declining rates equate to rising sales. I've seen these claims for years, but I wonder if they are true.

Let's find out!

What They Would Have Us Believe

It's important to note that interest rates are influenced by a number of factors, including the state of the economy, inflation, and monetary policy. The Federal Reserve, for example, can adjust interest rates to help stabilize the economy during times of economic uncertainty. This means that interest rates can fluctuate rapidly, leading many to call for changes in demand in the housing market.

Experts claim that mortgage interest rates significantly impact the housing market and can make or break it, depending on the current interest rate environment. Low-interest rates can promote economic growth and stability, while high-interest rates can lead to decreased demand for housing and a slowdown in the market.

In order to provide the best guidance for home buyers and sellers, I have analyzed more than thirty years of interest rate trends and how they impacted the housing market each year. As with all housing metrics, the results were not what the experts led us to believe.

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So here's the "logic" behind the claims of the link between mortgage interest rates and annual home sales. You have to admit; it certainly makes a lot of sense:

The impact of interest rates on the housing market can be seen in both the short-term and long-term. In the short-term, a sudden increase in interest rates can lead to a decrease in demand for homes as prospective buyers struggle to secure financing. This can cause home prices to drop and result in a slowdown in the market. In the long-term, high interest rates can impact the economy as a whole, leading to decreased consumer spending and a reduction in economic growth.

On the other hand, when interest rates are low, more people are able to afford to buy homes, leading to increased demand and a rise in home prices. Low interest rates also make it easier for existing homeowners to refinance their mortgages, which can help them lower their monthly payments and free up extra cash for spending. This, in turn, can stimulate the economy and promote growth.

But now, let's look at what actually happened over the past 33 years.

US Home Sales vs. Changing Mortgage Interest Rates

The following graph plots the annual change in mortgage interest rates in blue, and the annual percentage growth or decline of US home sales in red.

Graph shows how the change in mortgage interest rates impacted home sales for 32 years

When we put it all together, we find that home sales only fell in 45% of the years that mortgage interest rates rose, and home sales rose in just 73% of the years that mortgage interest rates fell. These are hardly the numbers to support a belief that home sales go as mortgage interest rates change. Here's what 33 years of home sales and mortgage data reveal:

  • Number of years where mortgage interest rates rose (11) (33% of all years)
  • Number of years where mortgage interest rates fell (22) (67% of all years)
  • Number of years where home sales rose (22) (67% of all years)
  • Number of years where home sales fell (11) (33% of all years)
  • Number of years where mortgage interest rates rose and home sales rose (6) (55% of increased-rate years)
  • Number of years where mortgage interest rates fell and home sales fell (6) (27% of decreased-rate years)
  • Number of years where mortgage interest rates rose and home sales fell (5) (45% of increased-rate years)
  • Number of years where mortgage interest rates fell and home sales rose (16) (73% of decreased-rate years)

Home sales actually fell in more than a quarter of the years when interest rates fell, and home sales rose in more than half of the years when mortgage interest rates rose. There obviously has to be more to the changes in the housing market than just mortgage interest rates, right?

Facts, Not Hype

If you want to know what's going on in housing, to see and hear the data explained, to ignore the hype that's so prevalent online, I encourage you to join the growing list of subscribers to the Joe Manausa Real Estate YouTube Channel. We work hard to deliver the facts as they are published by major housing market monitoring sites such as Zillow, FRED, Black Knight, US Census Bureau, Redfin, and others.

By casting a wide net across the US housing market, we can better understand what is going on and what is likely to occur in the coming months and years. We focus on the data which paints a fair picture of the housing market. You might wonder why there is so much hype online today. Neil Bogart, the founder of Casablanca Records, once opined, "If you hype something and it succeeds, you're a genius - it wasn't a hype. If you hype it and it fails, then it was just a hype."

Unfortunately, hype sells as well today as it did 50 years ago, so we should expect more hype for the time being. Solid research, combined with on-the-ground experience, will help us continue producing the hype-defying content our customers and followers need when deciding about their housing market needs.

We might not always be right in our forecasts, but we will endeavor to deliver the information you need to make informed decisions when you decide to move. Don't let the hypesters lead you astray, follow the data; it is usually fairly straightforward.

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Discussion

#1 By EVA ARMSTRONG at 2/7/2023 7:52 AM

Interesting data - so when a buyer says that the increase in mortgage rates is causing a reduction in homes sales and thus home prices to drop to justify the really low offer they want to make, what is the clearest response?

#2 By Joe Manausa, MBA at 3/21/2023 5:07 AM

I like to show the numbers Eva. If I'm confident in the value of a home, I ask the buyer why they think it will sell for less. There's such a low number of homes for sale, it's still a seller's market at most price points. It's important for buyers to know that so they can get the best deal possible (and still get the deal).

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