It just makes sense. When mortgage interest rates rise, fewer people can afford to buy homes. Home sales go down as a result. Conversely, when interest rates drop, homes become more affordable and home sales will go up.
There's only one problem with this premise. It isn't necessarily true.
According to Sam Khater, a deputy chief economist with CoreLogic, "the relationship is almost zero" between mortgage rates and home sales. At the very least, it's difficult to determine the relationship because there are many other factors affecting home sales some of which are far more likely to affect your likelihood of buying a home. Supply and demand, jobs, wages and inflation, and the availability of credit can all swamp the effect of interest rates. You can check your credit score and read your credit report for free within minutes using Credit Manager by MoneyTips.
Consumers appear to feel the same way. A 2017 poll by Redfin found that only 6% of respondents would cancel home buying plans if interest rates reached 5%.
Consider the recent housing woes. Interest rates are still low in historical context, but strong home sales have not followed. The primary reason is a short supply of affordable homes that has been squeezing first-time homebuyers out of the market. Earlier this year, Trulia found that the inventory of starter homes decreased by nearly 50% and prices increased by almost 58% compared to six years ago.
Millennials are hit with many homebuying hurdles. They came of age in the Great Recession that delayed careers and made savings difficult. Some have crippling student debt burdens. The lack of affordable homes and rising prices keeps raising the bar. It's no wonder home sales are having a hard time sustaining momentum, even with a rising economy and low interest rates.
Mortgage interest rates have been very low since the Federal Reserve cut the federal funds rate to near zero at the end of 2009 about the time that sinking home sales bottomed out because of the recession and the tightening of credit. Low interest rates made buying homes easier, but fewer people could afford homes at all or even keep the ones they already owned.
To go back even further for data, consider the 1980s. For most of the decade, thirty-year fixed mortgage rates were above double digits topping 18% in 1981. Home sales did fall during the highest levels of interest rates, but subsequent drops in interest rates didn't match the growth rate in home sales. Recession is the likely cause.
America experienced a severe recession during 1981-82. Unemployment topped 10% and didn't drop to 5% again until the end of the decade. Too many people were out of work and unable to afford a home or couldn't even begin saving for one. The month's supply of available homes topped ten months well above the six-month supply of a balanced housing market.
Let's say you want to buy a home right now. Are you going to be stopped by another 0.25% increase in thirty-year mortgage rates? Probably not. You're more likely to have trouble finding a home that fits your needs and price range because of the low supply and high demand that is driving up prices.
If you want a home badly enough, you'll either stretch your budget to buy your preferred home or you'll take our advice and scale back to a more affordable home. Interest rates should be a factor in how you determine an affordable home, but they shouldn't be a complete deal-breaker. If they are, you probably can't afford to buy a home at all.
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