Article by Justin Konz, Restoration Capital
With mortgage rates inching higher this past year, many are wondering the impact rates will have on home values. The graph below (source: the New York Times Economix) compares the national median home price to 30-year fixed mortgage rates over the last three decades. We thought this graph most easily illustrated data movement. Both home prices and mortgage rates were zeroed-out starting at 1971:
Correlation Between Median Homes Prices vs. 30 Year Mortgage Rates
If there was a strong correlation, rising interest rates would be followed by declining home values and vice versa. As the graph illustrates, we do not see these juxtaposed movements. This is a very surprising result since economic theory tells us that affordability should be a key factor in the purchase of a home. But historically speaking, the correlation factor between these two data sets is not very high year to year. For example, when interest rates skyrocketed to double digits in the 1980s, home prices remained relatively unaffected. Only over an extensive period of time (several decades) do we see a general inverse relationship between interest rates and home values. This does not rule out mortgage rates as an important factor however. Rather, this data suggests that there must be several other factors that also influence home prices including consumer fear, types of financial instruments being used at different periods of time such as adjustable rate mortgages, periods of recession or war, etc.