Several Realtors have asked us recently about the effect of higher rates on housing prices. This is b/c their own clients are concerned about buying now and risking a decline in values.
According to Fannie Mae’s Chief Economist, Doug Duncan, rate increases usually do not portend a decrease in values for several reasons.
1. If rates are increasing b/c the economy is growing, incomes are growing too. Growing incomes offset higher rates and maintain buying power.
2. If rates are increasing b/c of inflation, many buyers look for real estate as an inflation hedge, and this keeps demand strong.
3. If rates are increasing b/c the Fed is putting the brakes on an over-heated economy, fewer buyers put their homes on the market, reducing supply. And this reduction in supply keeps values up.
Mr. Duncan uses 2013 as an example, when rates rose 1.1% and home values did not fall. The number of transactions decreased by 10%, but values held. Similarly, in the late 1970s, rates skyrocketed and the number of transactions plummeted, but values held then as well.
Here is Mr. Duncan in a short video explaining this: Higher Rates Won’t Hurt Home Prices
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