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 home prices to surge, and a frenzy of buyers will ensue because they are just WAITING on rates to fall.  Therefore, you need to “buy now” before the bidding wars start and home prices start surging.

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 ratio right now of someone who bought within the past five years is about 45%, which means buyers on average are spending over 45% of their net take home monthly pay on their house payment.   That number is WAY too high, as it should be LOWER 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 on their current house, 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-handle 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 than a new buyer because they are essentially using that equity to lower the price of their next house.  A low enough rate could break the golden handcuffs many sellers are wearing right now and incentivize them to sell.  That would help 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.  Employing the expertise of a good buyer’s agent is critical.  The price of the house can NEVER change for as long as you own it, and we are in the market to NEGOTIATE THE PRICE!  The rate can be refinanced, provided you have enough equity.  IGNORE sales pitches from realtors who are not tracking the market (and don’t understand basic macroeconomics) but only repeating what someone else said about rates.

Thanks for reading!

-Ryan