Will Increasing Mortgage Rates Impact Home Prices?

Are you thinking about buying a house but are worried about mortgage rates and the prices? Keep reading to learn about the rates and how they will affect homes. 

When you are buying a home, most people are curious about the rates and home prices. Both of these play a huge role in whether you can afford to buy a home or if it is a good time to buy. However, there is no way of telling where rates will go or how the housing market will change. 

Home buyers are hoping that in 2024, the home prices will begin to normalize again. The promising sign is that mortgage rates were at an extreme high all throughout 2023 and have seen a slow decline over the past months. 

Despite all the predictions, mortgage rates have remained high, and home prices have stayed high, making homeownership harder for many people, especially first-time buyers. 2023 was not the year for home buyers, so fingers are crossed that this year is the year, and economists are optimistic that the economy is going to get better. 

If you are a potential home buyer and want to keep up to date on the trends and information about mortgage rates and home prices this year, keep reading to learn more about rates and the impacts they are having on the market. 

Here is what to know about mortgage rates and home prices. 

1. Does Interest Rates Affect Home Prices

Interest rates do affect home prices, and they usually go hand in hand with each other. When the Federal Reserve increases interest rates, home buyers can not afford expensive homes or their dream homes, so the prices will start to drop. Many big celebrities are dropping the prices of their homes for this reason. 

When mortgage rates are low, buyers have more money than they are able to spend, so home prices tend to rise because the supply is high, but demand starts to drop. However, the housing market is constantly changing, so it does depend on how the market is at the time. 

So, depending on the interest rates and mortgage rates, home prices and the housing market will fluctuate. Keeping up with the market is the best way to determine whether you can afford a mortgage and an affordable home. 

Below is a chart based on data from Freddie Mac to help see the changes in mortgage rates and the median sales prices of homes. 

2. Are Home Buyers Impacted by Rates and Prices

Both the rates and prices impact home buyers and their decisions about whether or not they are going to make the big purchase. If the interest rates and/or the housing prices are high, then first-time home buyers may be hesitant to enter the market or may not be able to afford to buy a home. 

Knowing if it is the right time to buy a home is the first step you should take before you take action. Home prices and rates are two very important parts of the home-buying process, as well as obtaining a mortgage because of the down payments and monthly payments. 

Down Payment

The standard to avoid private mortgage insurance is to put down a 20% down payment when you are buying a home. As home prices start to increase, you will be required to make a larger down payment as well. If you can not afford the 20%, there are some tenders to accept others depending on the type of loan you have. Keep in mind that smaller down payments equal higher interest rates. 

Monthly Payment

The price of your home, your down payment, and the interest rates will all go hand in hand with how much your monthly payments will be. If you have a more expensive house, the payments will be higher, as well as the interest rates, so just be aware of the prices. 

3. How Are Rates Determined?

Interest rates are the amount charged on top of the amount by the lender to the borrower for the use of assets. The rate charged by banks is determined by a number of things, such as the state of the economy at the time. There is usually a set interest rate at the bank, which is determined by the range of annual percentage rates they offer

Banks tend to raise the interest rates when inflation is high because the higher taxes mean an increase in the cost of debt, so it slows down the demand and makes people not want to borrow as much. So, knowing where the economy is is very important in the home-buying process. 

4. Why are Mortgage Rates so High

The recent mortgage rates have been because of several factors, especially the Federal Reserve increasing the short-term interest rates. The rise of interest rates started in 2022 to try to control inflation and made mortgage rates skyrocket. The Fed Funds rate does not directly impact the mortgage rates, but it does influence them. 

Mortgage rates are running at a 22-year high, crimping a housing market with high prices. The rise in rates has cooled demand for homes, while sellers are reluctant to sell their homes because of fears they will not be able to find comparable rates. Based on many things, the economy plays a huge role in the rates and the housing market. 

Economists do predict that mortgage rates will remain high for a few more months and then start to come down well above the 3% rates that many home buyers had before the pandemic. There are many things that you can do as a home buyer to get lower rates, such as having a solid credit score, down payments, and saving money

5. Impact on the Housing Market

Overall, when the interest rates are high or increasing, then the housing market will slow down. When the rates rise, the cost of owning a home becomes very expensive, reducing the demand for homes and resulting in a drop in home prices. 

When the banks increase rates to slow down the economy, they are looking to drop home prices due to inflation. On the other hand, if the rates fall, the cost of buying the home is cheaper, which then will increase demand for a home, which will create a bustling housing market. The increase in demand for homes will slowly, over time, increase home prices as well.  

These rates have a huge impact on the housing market. Depending on the rates, it shows the consumers how much they need to borrow to buy a home, the influence of the value of the real estate, the demand, and the prices of the houses. Rates are constantly changing due to the economy, so be aware. 

6. Will Mortgage Rates Go Down in 2024?

Mortgage rates are expected to go down in 2024. The average US rates for both 30-year and 15-year fixed-rate mortgages have been dropping slowly since November 2023, and that trend continued into January. The mortgage rates are predicted to continue to go down throughout the year because the Fed has indicated that they will lower the federal funds rate three times in 2024. 

Even though the mortgage rates will be lower in 2024, keep in mind that it will not be a drastic change. The National Association of Realtors believes the rates will go down about 1.2% by the end of the year. The low rates will be a start but will only have a small impact on the monthly payments, so do not expect a massive drop in prices. 

7. Housing Market Forcast 2024

2024 has been believed to be a better year to buy a home for some. Home prices will still be higher than usual, with some increase in between, but in most areas, the prices are supposed to level back out. Economists are optimistic that the Fed will lower rates, which will then influence mortgage rates and home prices. 

The affordability challenges will still continue to be in effect in 2024 like they were in the past year. The demand and low inventory of homes will still have a huge impact on the prices of houses, but the lower rates will also help prices level out. 

Many homeowners bought their homes at low interest rates and are unwilling to sell due to the high home prices, so the low inventory will most likely still be in effect in 2024. The housing stock has been at a historic low, making ultra-high prices, but there are hopeful signs that it will trend back up with the declining mortgage rates and better home-buying conditions. 

Methodology

We used information and data from different sources to determine if mortgage and interest rates impact home prices and the future predictions on the housing market and economy. There were various data to use, and we put them all together to find out the trends. 

• Freddie Mac
• The Federal Reserve
• The National Association of Realtors
• The NY Times

Those are some sources that we used to gather our information about mortgage rates and home prices. 

FAQS

Is it better to buy a house when interest rates are high?

Even with high-interest rates, it can still be a good time to buy a home. The higher interest rates have priced some buyers out of the market, which means you will face less competition when you are searching for a home. 

What happens if mortgage rates increase?

If the Fed raised its rates during a fixed period, the mortgage rates may rise but will not make a large impact. The mortgage rates tend to follow the trend of the interest rates. Mortgage rates will increase, and housing prices will also increase. 

Do rising interest rates hurt home prices?

Interest rates do have an effect on home prices. When the Federal Reserve increases their rates, home buyers tend to not be able to afford a home, so then housing prices will slowly drop. 

Will Increasing Mortgage Rates Impact Home Prices? - The Bottom Line

If you're looking to buy a home, you need to be fully aware of the impact that home prices and interest rates will have on your buying decision. These two factors are crucial in determining whether you can afford to buy a home and whether it's the right time to do so. But let's be clear: no one can accurately predict where interest rates will go or how the housing market will behave.

Home buyers are hoping that in 2024, the home prices will begin to normalize again. The promising sign is that mortgage rates were at an extreme high all throughout 2023 and have seen a slow decline over the past months. 

It has been challenging for many people, particularly first-time buyers, to become homeowners due to the high mortgage rates and home prices that have persisted despite earlier predictions. It's disappointing to hear that the situation did not improve in 2023. However, we are optimistic that this year will bring some much-needed change as economists are hopeful about the economy's improvement. 

If you are considering moving or selling, contact us or visit our website. Our team at Raleigh Realty is here to help you with any home buying or selling needs.