Will Rising Interest Rates Cause Home Prices To Fall?

I’ve been hearing an awful lot of scuttlebutt lately about interest rates and what they might do to housing prices as they creep upward.

What does your scuttlebutt saying about interest rates?

Well, rates are going up housing prices must be coming down.

(Sigh) I think this is going to be a little more complicated of an answer, so let’s look at the data…

Field trip!

Alright Ash, so what we got here is we’re looking at three different factors that we’re tracking. We’re tracking interest rates which varied over the last 10 years from 2% up to 7%, prices, the average price for Scottsdale which vary between $300,000 and upward to $700,000 and then of course we’re tracking time…2002 all the way to 2013 and current.

So what is your scuttlebutt saying?

Well, how do you explain your chart because according to what the media and all the “scuttlebutters” out there are saying as the rates are rising, the prices are going to start to come down.

Ok, so what she’s saying is CNBC, CNN anything you read, media out there, blogs, all this stuff are saying…

Scuttlebutters!

So, what we’re going to do here today is we’re going to look at the last 2 times the interest rates either rose by 2% or fell by 2%.

So, let’s look at the last time interest rates rose by 2%. So, in 2002 interest rates were averaging about 4.5% and then until 2006 they went up 2% to nearly 6.5%, so the scuttlebutters said that if interest rates rise, prices drop, but why last time…interesting, it seems that the opposite is happening…wait, so prices were at $300,000 then they went to almost $700,000 while interest rates went up 2%.

Correct…but the scuttlebutters are saying that interest rates are going to rise but prices are going to fall. There’s this guy names Micheal Orr, he says that there’s “No inverse correlation to interest rates and prices.”

In that voice, hahaha.

Ok, so what we’re saying is that ok when it went up, prices went up, your right there. But what happened when interest rates fell because in 2008 interest rates went down for the 2010 they dropped by 2%, so according to the scuttlebutters that means prices must have rose. What happened?

The opposite, in fact the prices continued to decline during that time. See, the signs of lowering interest are a sign of economic trouble, right?

Exactly, Ashley well said. Absolutely because what they do not realize is that the reason why interest rates go up or why the government allows interest rates to go up because they’re held artificially low, is that the economy is getting better.

The market will bare it.

Right, because the pool of buyers gets bigger, therefore overcoming the…what do they call that when interest rates are going to have….

Interest rates are only going to have an impact on affordability not demand. Right.

According to history.

Right, history says that demand will increase although affordability will be less…understanding the difference will tell you why there is no “inverse correlation between interest rates and prices.”

Ok, Jeff, what if interest rates go to 16%?

We’re going to need a bigger chalkboard.

Hahaha, we’ll see you next time!

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