Mortgage rates vs. house prices: The correlation and dynamics
Quick insights
- Mortgage rates are influenced by broad economic factors and set by specific lenders, but there is a complex relationship between rates and home prices.
- In general, high rates can decrease housing demand and stabilize home prices, while a low-rate market can cause a surge in demand and asking prices.
- When mortgage rates decrease, housing demand can naturally increase, which can cause house prices to increase, too.
The real estate market can be complex; housing is subject to supply and demand economics. Mortgage interest rates and home prices tend to represent the state of the real estate market, and there can be a correlation between rates and prices. However, it’s a relationship that depends on specific market dynamics and the individuals who are buying the homes.
In this article, we’ll dive into the nuanced correlation between mortgage rates and house prices.
Why mortgage rates typically change
Mortgage rates are a general reflection of broader economic conditions, government actions and bank policies. A rise or fall in the federal funds rate, for example, could cause mortgage interest rates to fluctuate accordingly. Besides federal actions, the rates offered by financial institutions and mortgage providers can also be influenced by their own business and risk strategies—not to mention the individual borrower’s financial standing.
What is the correlation between mortgage rates and home prices?
In general, mortgage rates and home prices have an inverse relationship. When mortgage rates decrease, borrowing becomes cheaper, potentially creating demand for homes. This higher demand can drive up house prices. On the contrary, a high-rate market makes borrowing money more expensive. This can reduce demand and put downward pressure on the price of homes across the market.
Do house prices increase when mortgage rates are low?
In general, during periods of low mortgage rates, house prices can rise because of a supply and demand relationship. When lenders’ rates are low across the market, borrowing money is generally cheaper. For mortgage loans, low rates tend to stimulate the real estate market. Low rates can lead to increased demand for homes, sometimes driving prices up.
However, supply and demand doesn’t just happen because of mortgage rates. Local and regional housing markets can have their own nuanced supply and demand dynamics that affect home prices. If the supply of homes is limited, even a small increase in demand can significantly increase asking prices, regardless of the general rate market.
How lower rates increase buying capacity
A lower rate can impact your ability to buy a home in a few ways:
- Lower monthly payments: With a lower rate, the interest portion of your monthly mortgage payment decreases. This will affect what you pay each month, and depending on your situation, you might be able to afford a more expensive home without increasing your monthly budget.
- Larger loan: Lower rates can make it easier to qualify for a large loan (more expensive house) because the monthly payments are more manageable. As a result, you could consider homes that would be out of reach with a higher mortgage rate.
- Better loan terms: Lower amounts of existing debt can improve your total debt-to-income (DTI) ratio. This is a key factor mortgage lenders review when reviewing applicants; a lower ratio can potentially lead to better loan terms. You could qualify for a lower rate and increase your homebuying budget.
Future trends in mortgage rates and home values
Experts tend to try and predict important factors that will influence rates, such as historical mortgage rates and changes to the federal funds rate. Broad real estate trends are difficult to anticipate, though, despite resources that can help monitor mortgage rates and house prices. If you’re in the market for a home, consider checking current mortgage rates in your area—our tool is updated every weekday.
The impact of significant economic events
If history can provide any insight, it’s that significant economic events can drastically affect the real estate market. Local, national and global events have a real impact. For example, following the 2008 financial crisis, home prices fell, foreclosures increased and lending standards got stricter. The COVID-19 pandemic also caused fluctuations in the real estate market, such as slower construction, a dip in mortgage rates and a rise in demand.
Given how many factors influence mortgage rates, consumer behavior and market activity, there’s no telling what could cause the next major trend in real estate.
In summary
Mortgage rate trends have corresponding effects on house prices across the real estate market. On the one hand, lower mortgage rates can create housing demand and increase prices as a result. On the other hand, a high-rate market might decrease homebuying demand and cause home prices to rise slowly or stay mostly flat, depending on the national or regional housing market.
Anytime can be a suitable time to keep an eye on market trends and explore your options. Using mortgage calculators and researching rates can help along your homebuying journey. Finally, working with a knowledgeable advisor can help you make the right choice for your unique situation.
