Will Lower Interest Rates Drive Up Home Prices?

The prevailing mindset among most people in the real estate industry is that lower mortgage rates will cause homes prices to surge, and that we will see a 2022 market all over again.  Therefore, you need to “buy now” before this happens.

I have a COMPLETELY different take on this.  Here’s why:

Even if rates go down a full point, it would only change the payment by about $200 on a $500,000 house.  That is not enough to make any meaningful impact on affordability, which is what ultimately drives the housing market.  The average debt to income right now is about 45%, which means buyers on average are spending over 45% on shelter costs.  This is WAY too high, as it should be less than 30%.

But consider this:

A seller’s #1 reason for not selling and moving is because they are locked into a low rate.  Rates right now are in the 7% range.  If a potential seller has a sub 4% rate, would they give that up to take on a 7% rate?  Probably not.  But would they give up their 4% rate for a rate with a 5 in front of it if they really want to move?  Probably yes.

A seller who is sitting on a ton of equity that can be rolled into their next purchase is in a completely different situation.  A low enough rate would potentially break the golden handcuffs so many sellers are wearing right now and cause them to sell.  That would open up inventory to where the supply/demand ratio would favor buyers and lower home prices would follow.

Bottom line is:

As a potential home buyer, focus on the PRICE, not the rate.  The price of the house can NEVER change for as long as you own the house.  But the rate can be refinanced, provided you have enough equity.  IGNORE sales pitches from realtors who are not tracking the market, but only repeating what someone else said about rates.

Thanks for reading!