The question has been raised by some bloggers as to whether rising mortgage rates, widely predicted, could further dampen home prices. The argument is that rising rates would shrink the pool of eligible buyers, thus weakening demand for homes. If such a linkage comes to pass, it would surely pose a conundrum for buyers: should they wait for prices to go down, or act now before rates go up? It could keep a body sleepless at night.
Tim Ellis over at Seattle Bubble has thoughtfully graphed both rates and prices since 1950, highlighting in yellow two extended periods when rising interest rates preceded falling home prices (see the chart). Over the past 20 years, of course, there has been no such correspondence. I’m not an economist, but I have to wonder if these two historical examples are relevant for us today: every era is different.
I continue to be optmistic that in a few years time, home prices will once again start going up, albeit more slowly, and will do so for the same reason that interest rates will go up: increased economic activity, more people working, more wanting to buy homes. The increased demand for money, and for homes, will put upward pressure on the cost of both.
Given the depth of the recession, we should not be surpised, however, if progress comes slowly, by fits and starts, and with some backsliding along the way, some further, moderate drop in home prices. There will also be different outcomes in different parts of the country, reflecting local conditions.
Tim wrote his piece in response to a reader who reports feeling pressured to buy before rates go up. I’ve always believed, and I’ve always advised buyer clients to this effect, that noone should feel pressured to meet a deadline, be it for the tax credit, or to get a jump on rising interest rates. At the same time, it would be feckless to ignore such issues altogether. The key is to keep these externalties in perspective, and include them with all the other factors — personal and financial — that must go into making such an important decision.