A 1% drop in mortgage rates is worth an 11% drop in home prices

A recent podcast by First American Economists discussed the current state of the housing market.

The topic was the rebalancing of the housing market, which has been out of whack for some time.

Over the last several years, it’s decidedly tilted toward home sellers, who have enjoyed bidding wars and above-asking offers.

As 2023 progresses, it looks like it is finally going in the opposite direction in favor of the home buyer.

But there’s still the question of affordability, and what exactly will happen to mortgage rates and home prices.

1% drop in mortgage rates = 11% drop in home prices

an interesting thing What stood out most was the following line: “Today, a one percent drop in mortgage rates has the same effect on affordability as an 11% drop in home prices.”

logic of home prices vs mortgage rates Has been for years. Most believe it is the hammock.

If one goes up, the other must go down, often by an equal amount. But the data says otherwise.

In fact, the two can go hand in hand. For example, both home prices and interest rates are likely to increase if the economy is doing well.

Assuming that wages are rising and the average American is earning more, this supports home price increases.

But the year 2022 was different from any other year in history in this regard mortgage rate,

We didn’t see a normal increase in rates, we saw an unprecedented increase in rates.

2022 Was a Very Strange Year for Mortgage Rates

While higher mortgage rates don’t always portend lower home prices, 2022 was a year like no other.

Mortgage rates had never doubled in a calendar year, but they did significantly more in 2022. The Popular 30-Year Fixed Year started at 3.22%, and ended at 6.42%, per annum Freddie Mac Data,

This was certainly enough to reduce the demand for home buyers, or worse, make people ineligible for home loan financing.

At the same time, it seemed as though the housing market had topped out due to a steep increase in interest rates.

Typically, you can see mortgage rates increase by a percentage or more in a year if they’re trending higher.

and if you see Mortgage Rates in the 1980sFor those who were in a different league by comparison (eg 18%), again the increase was not as pronounced.

We’re talking about 14% to 18.5% growth over a 12-month period, at its worst from late 1980 to late 1981.

But if you look at it in percentage terms, it was only an increase of 36%.

As mentioned, 2022 originally saw a 100% increase in the going rate for the 30-year fixed mortgage.

This eventually reduces the demand for housing and causes a shift to seller buyer’s market,

Mortgage rates expected to fall 1% compared to 11% for home prices

First US Deputy Chief Economist Odeta Kushi also said that historically “a percentage point increase in rates is more likely than an 11% increase in prices.”

The general view is that house prices are downward sticky, meaning they rarely fall, although if inflation is strong, real house prices may fall even if nominal prices barely move.

Either way, it’s easier for mortgage rates to drop than for home prices to take a double-digit dive, even though many people expect housing market crash,

And this is especially true now because the current housing market is not the same as that seen in 2008, when the Great Recession led to foreclosures and short sales.

I’ll repeat what I always say – This isn’t your older sibling’s housing market, Today’s mortgages are mostly older and have lock-in rates in the 2-3% range.

Most of these homeowners are not selling, which is why home prices should remain fine.

Additionally, because mortgage rates have already come down, housing affordability can improve in this way without requiring a large drop in home prices.

30 year old fix has already increased above 7%, and is now close to 6%. Some lenders are quoting rates as low as mid-5% if you make a couple payments. discount points,

So equilibrium in the housing market may come from lower mortgage rates, not lower prices.

This allows sellers to command a good enough price to forget what their home used to be worth.

And it gives buyers the ability to purchase a property even if their down payment is still a bit high based on the high asking price.

Read more: 2023 Home Buying Tips

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