You may have seen in the news recently that mortgage interest rates are at their lowest since May 2023. The news comes with a lot of excitement for prospective home buyers and is seen as a good sign overall for the housing market and its outlook through the end of the year.
This month I thought I’d dive deeper into what the numbers show about mortgage interest rates and their actual effects, if any, on the housing market.
The prevailing thought and the obvious connection between mortgage rates and housing is that lowering rates increases a home buyer’s spending budget, which should in turn create a hotter, more competitive and active market.
Before we dive into mortgage interest rates, I should start off by noting that we like to use the umbrella term “housing market” quite often. Though the term implies that the housing market is one, singular thing, really the housing market consists of numerous smaller markets.
These markets can be based on the type of real estate, price ranges and/or location, among many other criteria. Even Maine and New Hampshire’s housing markets are made up of diverse markets that are vastly different in price ranges and temperatures.
With that being said, combining these markets into the umbrella term we see on the news can be useful to help understand trends and make general observations and predictions about the health and future of housing.
Still, you should keep in mind that any factor, including mortgage interest rates, can affect different markets in different ways.
Perhaps it goes without saying that home mortgage interest rates certainly affect housing markets. A majority (around 80%) of homes are bought with financing, and changes in interest rates on those loans drastically change a prospective home buyer’s affordability range.
Lower interest rates mean more spending power for buyers and vice versa.
Bankrate gives an example of this for a home buyer looking to finance $320,000 for a home. With an interest rate increase from 6.9 to 8 percent (an overall increase of 1.1 percent), the home buyer is looking at a $243 increase in her monthly mortgage payment.
A change like this, especially in competitive housing markets like what we’re seeing here locally, can be a major factor in a home buyer’s search.
But what have we actually seen for trends in the housing market over the last few years as interest rates climbed in the Fed’s efforts to combat inflation?
In the long term, home sales and volume tend to be resilient to fluctuations in home mortgage interest rates, particularly to rising interest rates.
In the short term, particularly in the last couple years as mortgage interest rates have risen steadily, overall trends show that home sale volume decreased with rising interest rates. However, despite an overall decrease in volume, or number of homes sold, we continued to see rising sale prices.
This seemingly goes against conventional economic thinking. I.E. Increasing mortgage rates mean a decrease in spending power, which lowers demand and subsequently lowers costs.
But keep in mind that there are many factors at play here, and mortgage interest rates are only a small component of a much larger picture. Economic factors like inflation, unemployment rate and even the stock market play a role in housing markets.
These factors can skew any expectations based on conventional wisdom and need to be considered as we monitor mortgage interest rates month to month.
For example, one of the biggest factors for rising home sale prices over the last few years is availability. A decrease in supply, particularly the low inventory we’ve been seeing of late, helps drive prices up, regardless of interest rate numbers.
I noted previously the decline in volume of home sales despite a market with a healthy supply of prospective home buyers.
Low inventory has continued to hamper volumes in Maine and New Hampshire. But lowering interest rates could potentially incentivize homeowners looking to upsize or upgrade their living arrangement, helping to increase inventory and help boost home sale volumes.
Although home mortgage interest rates aren’t the sole factor determining home prices, adjustment in rates certainly have an effect on the overall temperature of housing markets.
The lowering rates will bring much-needed relief to prospective home buyers as they continue to navigate a competitive market stymied by low inventory.
If you have any questions or would like to discuss real estate or home mortgage interest rates, feel free to send me a hello!
