Fannie Mae: Mortgage Rates Unlikely to Influence Home Prices

According to a study recently conducted by Fannie Mae, rising mortgage rates are not expected to impact home prices. After reviewing prior mortgage rates going back more than 20 years, Fannie Mae researchers concluded that while mortgage rates may dampen the pace of home sales in the short-term, rates alone are not expected to cause falling home prices. This is good news for the economic recovery, which has been driven by rising home prices and buyer demand for both new and existing homes.

Past Periods of Rising Rates: Little or No Market Impact

Fannie Mae researchers studied two specific time periods when mortgage rates rose quickly. From October 1993 to December 1994, mortgage rates rose from 6.80  to 9.20 percent. During the period between October 1998 and May 2000, mortgage rates increased from 6.70 to 8.50 percent;

The rates cited in the study were higher than current mortgage rates; average rates for a 30-year fixed rate mortgage have increased from 3.49 to 4.51 percent since May.

During the first period studied, home prices leveled off and dropped slightly, but researchers found that home prices were not affected during the second period of rapidly rising mortgage rates. Based on these findings, the report states that "History suggests that interest rate increases at the level recently witnessed will not stop the current housing recovery." Mark Palim, who led the Fannie Mae study, noted that sellers are reluctant to reduce home prices as rates change.

Home buyers may seek smaller homes or be more inclined to take advantage of lower rates offered by adjustable rate loans than to leave the housing market altogether. While 30-year fixed rate home loans offer the security of fixed payments, adjustable rate mortgages can be useful for home buyers seeking affordable payments or those not planning to stay in the home they're buying indefinitely.

Housing Recovery and Rates: Some Economists Disagree

Not everyone agrees with Fannie Mae's position on rising rates and home prices. Mark Zandi, chief economist for Moody's Analytics, researched mortgage rates over 20 years and found that for every percentage point mortgage rates rose, the pace of rising home prices fell by about one-half a percentage point.

Lawrence Yun, chief economist for the National Association of REALTORS, said rising rates would slow the rate of home sales, which would increase inventories of homes for sale and lower the demand for homes. As demand for homes diminishes, home prices would be expected to fall.

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