With the recent increase in interest rates, many people assume that home prices will decrease. After all, if fewer people are able to purchase a house due to higher mortgage rates, then the demand for homes (and therefore the price) should decrease. But will this be the case?
What Happened During Previous Rate Increases
The last four times mortgage interest rates skyrocketed—between May 1983 and July 1984, between March 1987 and October 1987, between October 1993 and December 1994, and between April 1999 and May 2000—home prices did not fall. In fact, they increased.
Calculated Risk noted that home prices don’t typically follow mortgage rates. Even though interest rates spiked in the late 1970s and early 2000s, home prices rose steadily. Prices only fell dramatically around 2007 during the Great Recession. You can view a graph of housing prices and mortgage rates here. According to author Bill McBride,
The bottom line is other factors (like a stronger economy) have a bigger impact on house prices than changes in mortgage rates.
History has shown that no, home prices will not fall if mortgage rates rise.
If you are planning to buy a home in Washington D.C., Maryland, or Northern Virginia, be aware of rising mortgage rates. Since home prices do not tend to fall with a dramatic rise in interest rates, you may want to start your home purchase process to lock in current rates, which are still relatively low compared with past years. If you are interested in purchasing a home, we can connect you with a recommended local lender.
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