Will spiking interest rates increase house prices?

Question

There's definitely been an up tick in mortgage rates lately. We are at the highest rate in more than a year now according to this chart from Freddie Mac.

Even Bernanke said in reference to the spike in interest rates: "We were a little puzzled by that".

Do you think that if this persists house prices will go down as buyers buying power is reduced or will home prices go up due to increase demand from buyers that have been sitting on the sidelines and are now afraid of missing out on locking in historically low interest rates?

Jeff S. · Answer

I think you can argue either way.

Those that have been sitting on the fence waiting to buy might see higher interest rates as a wake-up call to either take action now or miss the boat.

On the other hand, household income has not been rising even though housing demand has recently skyrocketed.  Higher interest rates with no additional income will eventually make housing unaffordable, reduce demand, and lead to lower prices.

In a more “normal” economy, household income would increase at a modest pace, create sustainable demand, and support housing prices.  In the meantime, it appears the housing market is being driven by the hedge funds (which are waning), local and foreign investors, and to a lesser degree, end buyers.

Until end buyers become the dominant and consistent purchasers, there will be the continued risk of a bursting bubble.

Now is a really good time to be very careful.

Jeff

Tom Goans · Answer

Robert,

I agree with what you hinted at, an increase in interest rates immediately lowers the loan amount for which a buyer will qualify. This will also affect real estate investors. The positive aspect is the reduction in the real estate bubble and the pressure to become more educated.

Robert, I think this will also have a positive aspect regarding your other recent post about the flooded market.

Robert Steele · Answer

10Y Treasuries (which mortgages rates follow) just hit 2.50% - the highest since debt ceiling crisis.

That was almost 2 years ago for those of you not keeping score.

Jeff S. · Answer

Up until they no longer go up. 4% is a great rate although a long ways from 3.25. Some deals could fail as a result of the higher rates. Still, better buy now.