January 25, 2019
How Higher Mortgage Rates are Likely to Affect the Market—In the Short and Long Terms
An abundance of flawed assumptions seem to beset those who are unfamiliar with the real estate market. One of the assumptions realtors and lenders run into rather often is that when mortgage rates rise, the prices of houses will be directly affected in a negative direction. That is to say, people seem to think that when lenders are charging more for mortgages, home sellers are likely to lower the amount they ask for homes to account for the difference, so that homes don’t become unaffordable.
That isn’t quite how it works.
Rather, mortgage rates usually rise when the economy is expanding, when more people have jobs, when the wages people are being paid are going up. In other words: when there is more money among the potential-buying sector, people are willing to put it toward home-ownership. People with jobs that pay well are more willing to pay a greater amount for a larger mortgage with a higher rate.
Housing prices, on the other hand, are more directly subject to the localized market itself: particularly the forces of supply and demand. Existing housing inventory acts as a limitation on supply, which raises prices; construction activity (particularly of starter-homes) acts as a release valve.
Still, the perception that the two forces are linked is drawn from a valid assessment of the indirect effects on housing costs of higher mortgage rates. This indirect pressure acts in the long term to weaken demand. This is especially true among the starter-home and lower-income markets, where the chances of default are always greater when mortgage rates are higher. These forces act to lower the number of people buying homes, which increases the standing inventory and slows the appreciation of home values. After time, prices stop rising and may even begin to go down.
Should one want to purchase a home in Jacksonville, Florida; Rockport, Massachusetts; Cumberland, Rhode Island, or any other city in our service area, we here at Topouzis & Associates, P.C., stand ready to aid at closing. Not only do we act as a bulwark against problems of the past, performing title searches and ensuring clear title to property—we also back our services with offerings of title insurance (click here).