February 24, 2015

Did Lower Interest Rates Cause Home Values to Go Up?

It would seem that mortgage interest rates should impact the cost of housing.    The higher the interest the higher the payment and the less affordable homes become and vice versa.   I discussed this before in the article  If Interest Rates go Up then Will House Prices Go Down? and I didn't find any direct correlation.   I think the real answer is that there are just too many variables to see a direct connection.   Or home shoppers simply don't think or act that way.

In the past 12 months rates have dropped and so you might expect to see that impact home prices.  This presents another chance to look for correlation.   With cheap loan interest rates we can all afford to spend more on homes right?

Lets look at 30 year mortgage rate history from Fannie Mae

In the most recent month January 2015 the average rate is 3.67%.   A year before that in January 2014 the rates were 4.43%.    Rates are down 0.76%.    That may not sound like a lot but its pretty significant difference if you're looking at the mortgage payments.

Now if the assumption is that rates going up will cause home values to go down then we can also assume logically that the opposite will hold true.   That means that if rates go down then home values should go up.   With cheap interest we ought to be seeing lower payments and that would let buyers afford to spend more on homes and thus drive up market values.

Ok so what kind of impact on home values could that 12 month change in interest give us.   Lets start with a $100k mortgage in January of 2014 and figure the payment then compare to what kind of loan we'd be able to afford with a similar payment at the January 2015 interest rates.

With interest of 4.43% a $100,000 loan gives a payment of $502.53
With interest of 3.67% a $109,500 loan makes the payment $502.15

Based on the interest rate change year over year buyers should be able to afford about 9.5% more house.  

The Realtor site tracks median home prices and from 2013 Q4 to 2014 Q4 prices are up 6%.     So we certainly haven't seen the nearly 10% gains that the drop in interest might imply.


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