< Back to JVM's Blog

How Interest Rates Impact Home Values (Not What You Think)

How Interest Rates Impact Home Values (Not What You Think)“Jay, How Naïve Are You?”

That was the response I got from a past client last spring when I was noting how higher interest rates had not yet impacted home values. I made the further mistake of saying I was not sure how much higher rates would impact values too, in light of all the other economic factors at play (inflation, low inventory, strong employment numbers, etc.).

The reader was adamant that higher rates always correlate to lower home values (and vice versa) – but, alas, they don’t.

The Urban Institute published this article in May: How Higher Mortgage Rates Have Historically Affected Home Prices.

The conclusion was that there is a positive correlation between interest rates and home prices, but the correlation is weak.

This is because many of the forces that push rates up are also the forces that push up home values. These forces include inflation and strong economic news relative to wages and employment (which correlates to more demand for housing in general – which pushes up values)

The article does, however, point out that in periods of quickly rising rates, the rate of appreciation slows significantly (but homes still appreciate in general).

The article’s final point is that higher prices may be here to stay because of an “acute housing shortage.”

This year we saw home values hold up amazingly well in the face of the fastest and largest increase in interest rates in 40 years.

While we are now seeing a slowdown in housing values due to a doubling of interest rates (and a resulting decrease in demand largely due to affordability issues), we are still not seeing the type of slowdown many analysts predicted. In addition, many other analysts are still predicting APPRECIATION for 2023. This Fortune article, for example, has a scary headline about the “Housing Market Downturn in 2023” but the author merely predicts much SLOWER APPRECIATION – of 1.8%!

When Rates Plunge – Sometimes Values Do Too

The chart at the bottom of this blog overlays two graphs: (1) average interest rates; and (2) average home prices.

What is most interesting to me is the period from mid-2008 to 2012 – when rates plummeted overall.

Values not only plummeted (because of other factors such as too much supply), but they did not start to increase until 2012.

The chart shows some correlation between rates and home values, but it is not that strong and it is not always consistent because there are so many other variables at play – as I mention above.

BUT – FOR THE DIE-HARD “INTEREST RATES ARE EVERYTHING” CROWD – I AM GOING TO MAKE A VERY STRONG CASE FOR MUCH LOWER RATES WITHIN 5 MONTHS IN WEDNESDAY’S BLOG.

So – if rates don’t impact values that much, everyone should buy a house without worry and prepare to refi into a lower rate; and – if rates do significantly impact values, everyone should buy a house because rates will fall soon and home values will climb in response. 😊

Chart: 30-Year Fixed-Rates vs. Case-Schiller Home Price Index

30-YEAR FIXED RATES VS. CASE SCHILLER HOME PRICE

Jay Voorhees
Founder | JVM Lending
(855) 855-4491 | DRE# 1197176, NMLS# 310167