25 May Will home prices fall if interest rates rise?

Q. Will rising interest rates cause home prices to drop if all else remains constant?
— Homeowner

A. Determining how home prices will move isn’t that simple.

Prices today are a the result of a complicated relationship between interest rates, demographics, inflation, the state of the economy, government policy and a host of other factors, said Andy Kapyrin, director of research at RegentAtlantic in Morristown.

He said no one factor will determine where home prices will move, but each can nudge them up or down.

“Low interest rates have been incredibly important to the housing market over the past ten years and have supported home prices from taking an even bigger dive during the recession,” he said. “By improving affordability, they provided support to home prices.”

Kapyrin said higher interest rates will impact affordability for prospective homebuyers who need mortgage financing to afford homes.

“In that way, you’re right that if all other things are held constant that home prices would likely fall,” he said.

But, all other things are not likely to stay constant.

Kapyrin said today’s interest rates are the result of Federal Reserve policy intended to support economic growth, and the Fed is raising interest rates in response to a stronger economy.

A strong economy and rising family incomes can offset some of the bite from higher rates, he said. Likewise, demographic pressures can be supportive as well, with the millennial generation is entering its prime homebuying age range. Millennials’ entry into the housing market may help to offset rising financing costs as well, Kapyrin said.

“The bottom line – higher borrowing costs are a con for home prices, but one shouldn’t evaluate them in a vacuum,” he said. “Many of the other factors that drive home prices may support them in the face of rising interest rates.”

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This story was first published in May 2017.