Who cares about low mortagage rates?

Assuming the typical homeowner who gets a 30-year fixed and sells the house after 4-7 years, does it really make sense to time your purchase based on rates?

I’m not great at running numbers, but it seems there’s a running tradeoff between home prices and mortgage rates. When rates rise, prices are depressed, yet nobody wants to buy. When rates dip, home prices rise to compensate, yet people rush out and buy the newly inflated prices. I don’t get it.

The rate directly effects the monthly cost of owning the house. When rates rise, housing prices decline not because “nobody wants to buy” but because “nobody wants to buy at such high prices that it’s a better deal to rent.”

I care. :slight_smile:

See, everybody thinks that. But when rates rise, the sale price generally goes down, so the monthly cost ends up being about the same. Or so it would seem to me.

The people who really benefit when rates go down are the ones who bought their homes when rates were high, and plan to stay in them for a while.

For those people, it makes sense to refinance when rates drop significantly below what they are currently paying.

OK, so then the people selling the house care, because it affects what sale price they get (or, given they usually have a mortgage, whether they’re ‘upside-down’ on the house).

But that doesn’t happen much - in the real world, monthly payments go up. Prices may stagnate, but don’t go down - certainly not for long.

The mortgage rate affects how much principal you can borrow (I can pay $1000 a month - with a low rate that pays a lot larger loan than with a high rate), and thus how much house you can buy.


Housing prices in California have consistently gone up since around 1994. Other than the dip from '89-'93, housing prices have gone up consistently since the end of WWII. All of this during fluctuating interest rates. I wouldn’t be suprised if interest rates affected the rate of housing price increases but that’s as far as I would take it.

In the U.S. you also have to factor in the tax break that you get for mortgage interest when determining what you can afford but that’s outside of the scope of the OP.

I agree that houses generally don’t go down for long and even a big dip now would still leave the prices high historically and could move up again at any time.

Lets look at a representative sample. Mortgage rates have been historically low for the last several years. A 30 year $300,000 mortgage bought before the rates dipped could have been close to 8%. It could even be well beyond that for houses bought in the late 70’s. That house at 8% has a mortgage payment alone of $2200 a month. If you refinance at 6%, the mortgage goes down to $1800 a month. If refinancing costs $2000, that cost can be made up in 5 months.

Typical refinancing may be slightly less dramatic at about 1% point but the cost is still recovered in less than a year.

I care…very much…thank you for your support.

I ran some quick numbers through a mortgage calculator.

Assuming you want a $200k loan.
@ 4%, your monthly payment is $955
@ 5%, your monthly payment is $1074
@ 6%, your monthly payment is $1199
@ 6.5%, your monthly payment is $1264

Or, if you can only afford a max of $1000
@ 4%, you could take out a $209k loan
@ 5%, you could get a $186k loan
@ 6%, a $167k loan
and at 6.5%, a $158k loan.

So even if you aren’t going to be in the house long enough to accumulate much equity, the interest rate is going to effect either your payment, or the size of a loan you can get.

Housing prices don’t reliably fluctuate in proportion to mortgage rates. Yes, if mortgage rates are high, housing prices won’t rise (or might fall a bit) because you won’t have people clamoring to buy the house at xxx price because fewer people can afford that price.

And different types of homes fluctuate more than others - around here (DC metro) townhouses take more of a hit during any kind of downturn than detached houses, and condos get really clobbered.

As one counterexample to the high rates = low price: In the early 90s, rates were falling. At the same time, our townhouse (bought in 1989) was losing so much value that, though we weren’t upside-down on the mortgage, we were pretty well stuck there.

What really drives price is the old supply/demand route. In the early 90s here, there was a lot of overbuilding and so the supply was high. These days, there’s been a lot of inflow of jobs and workers in the DC area, so demand has been higher. High enough to price people out of the market, which means fewer people can afford to move here or, if here, they can’t trade up. This has levelled off demand.

The correlation between interest rates and house prices is not as strong as you’d think it was.
Yes interest rates are going up right now (I don’t think they could have gotten any lower), and yes the housing bubble is reaching it’s max and seems to be cooling (I don’t think it could have gotten any bigger).
But while I see interest rates going back to 2000 rates (8% 30-year), I don’t see the house prices falling back to 2000 prices.