When rates rise, the amount of home a person can buy shrinks.
Example: A person can afford to pay $2,000 for a mortgage (principle and interest). With a 30 year mortgage, $2,000 a month will buy you:
$372,565 @ 5% interest
$300,615 @ 7% interest
$248,564 @ 9% interest
Therefore, a person who wants to buy--but has diminished purchasing power--has three options:
(1) Offer less for the same house he/she would have bought before. That puts downward pressure on prices. In our example above--leaving aside the downpayment--someone with $2,000 could finance $372,565 today (approximately), but only $300,615 with rates at 7%. So if he/she wants the same house, the offer will come in $72,000 lower.
(2) Buy a lesser home. If prices fall all the way, as (1) might suggest, then perhaps he/she could spend $300,615 for the same house that costs $372,565 today. But that won't happen. Some people won't be able to drop their prices that much. Plus, to the extent that mortgage rates and inflation move in tandem, inflation will "inflate" the value of the homes, just as it'll raise the price of lumber, shingles, bricks, paint, etc. So some homebuyers will look for lower-priced homes--perhaps smaller homes, perhaps in less desirable areas.
(3) Don't buy at all. Consider renting. Someone with $2,000 today might well buy that home and finance $372,565. But if they take a look at what they can (or can't) afford if rates go to 7%, 9%, or more, then renting looks more attractive. Initially, rents won't rise as fast as the mortgage rates. The landlord's fixed costs are pretty much stable. Most likely, his biggest expense is a fixed rate mortgage. Other costs aren't going to soar, either. So renting will become more attractive. That would exert some downward pressure on prices, since you'd have a reduction in the number of buyers--and so less competition for the available housing.
There are, of course, other possibilities. There's creative financing, such as we saw, especially, when interest rates were 16% or so. Equity-sharing, owner financing, land contracts, lease-options all come to mind.
And with enough political pressure, Congress might come up with some sort of incentive or program (as it did with the first time home buyer tax credit) to keep home purchasing affordable.
But, from an economics point of view, higher mortgage rates mean lower prices.
A different twist to your question. What do buyers do when interest rates start going up?
They get off the fence and they start buying like there is no tomorrow.
This is not fiction this is factual. I seen it in the Reagan years when rates went from 10% to 12% to 17 %
Not to be stuck paying premium rates! People will get on the stick as the rates start to climb. In the coming years could this repeat itself? I think so. In the meanwhile cramming for price and rates people will start paying more. Just like they did during the tax incentive. The demand inflated prices because the buyer was squeezed within a time table and price.
We are presently in the eye of that storm.
It is inevitable that rates will go up. They have to. Yet even as the rates slipped again in a downward trend last week people are to complacent to notice and to think ahead and buy now. This is the perfect time to buy regardless of whatever anyone says. A house is a long term investment. Most people borrow the money they buy with and the prices are all time low. There is little to loose but the opportunity. TIME
Buyers are not spending their cash. While rates are low the savings on monthly payments is better r than buying it for less and paying more .. With the present inventory prices will remain depressed for the next five years. There will be little new construction and eventually a shortage. I will bet you however that the house you buy today will cost you 25% more in five years.
Reality is that past history has indicated with Inflation and rising rates, home prices go up.
Even though one would like to believe otherwise. It is counter intuitive.
It all comes down to the city and county you live in and what happens within your 1-3 mile radius
economically, whether it is Mercer etc....
If the Economy is good say on that 1-3 mile island, you frankly are on an island doing well and everyone else tries to get on to that island.
New Jersey has done well due to proximity to Wall street, Pharma Companies, AT&T etc .and a State with a very high Annual Per Capita Income.
The purpose is to slow down the economy and to control prices going out of control.
Based on that principle the demand is less the product stays on the market longer and the competition of stagnating product's drives the prices lower.
If the economy is getting better - a moderate increase in rates may not affect the price of homes at all. The improving economy - and decrease in unemployment may balance the affects of rising rates.
Just one mans opinion! Glass is half FULL!
Licensed in MD, Virginia and D.C.
As sellers lower prices, values fall below what people owe and teh foreclosures rate start to increase. It is a neverending cycle until the government stops spending money it doesnt have and therefore stops borrowing money from China which is the number one reason rates are going to increase.