How Will Rising Interest Rates Impact Home Values?
INTEREST RATES ARE ON THE RISE:
HERE’S HOW HOME PRICES MAY BE IMPACTED
WHY ARE INTEREST RATES GOING UP?
The Fed recently decided to reverse its pandemic-era stimulus programs, causing mortgage rates to jump by over 2% since the beginning of this year. Rates may continue to drift higher in the months ahead because inflation is at the highest level in decades. High inflation also leads to high interest rates.
HOW DO RISING INTEREST RATES IMPACT HOUSE PRICES?
Part of the reason for rising interest rates is that consumer inflation has been running around 8.6% per year recently, compared to less than 2% per year throughout much of the past 15 years. House prices tend to up along with all the other asset prices in the economy during periods of high inflation. During the last period of high interest rates and high inflation, from 1970 – 1989, the average increase in house prices was 7.64% per year. During the past 20 years of low interest rates and low inflation, from 2000 – 2019, the average increase in house prices was 3.70% per year. House prices tend to go up at a faster pace during periods of high inflation. That’s why real estate is often referred to as a “hedge against inflation.”
WHAT ABOUT HOUSING AFFORDABILITY?
The only way that rising interest rates will impact house prices is if monthly mortgage payments start becoming unaffordable for home buyers. This is a real risk in today’s market, especially given the 20%+ annual increase in house prices we’ve already seen during the past few years. Here are two things that may reduce this risk and keep monthly mortgage payments affordable:
- Rising Wages: average wages have increased by approx. 5.1% during the past year. The trend toward higher wages may continue because there are currently over 11 million job openings in the economy. In times like this, employers tend to increase wages to attract or keep the workers they need.
- Rising Rent Payments: average rents have increased by 15.5% during the past year. This is nearly five times the average annual increase seen during the past decade. Mortgage payments may continue to be affordable relative to rent payments if rents keep going up.
NUMBER OF THE WEEK
THAT’S THE AVERAGE INCREASE IN WAGES DURING THE PAST YEAR
(higher wages may combat the affordability pressure of rising rates)Source: Momentifi
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