Watching Interest Rates

Today's mortgage rates are half of what they were twenty years ago. So?

As a graduate student , I did a study of the relationship between interest rates and real estate values. I found that an increase in rates pressured real estate prices downward. While this seemed quite an unexpected conclusion to me, my mentor, a banking executive, just nodded. He had a better understanding of how rising interest rates lower the income a property produces, and therefore its value drops. Since investors buy properties for their income, the inverse relationship made sense to him.

This has a reliable value impact for income properties, but the result is less predictable for the homes we buy to live in. That's because a home's value captures its usefulness to us in various ways: the shelter it provides, the efficiency of its interior layout and design, and the benefits we gain from the community, are some examples. Higher interest rates influence affordability, as a household budget has only so much room for a mortgage payment.  Stability in the other factors that determine the value of our home will blunt the effect of interest rates.

Image Source: Freddie Mac, 30-Year Fixed Rate Mortgage Average in the United States [MORTGAGE30US], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/MORTGAGE30US, May 21, 2019.