Mortgage interest rates have dropped by more than one percentage point over the last four months, and the Federal Reserve just cut the Fed Funds rate by half a percent last week.
In case you didn’t notice, many Realtors and pundits are writing (or posting on Instagram) about how falling interest rates mean more affordable borrowing and thus, rising home prices as more buyers will be able to afford a home.
“Better hurry up and buy before more buyers come into the marketplace to push prices even higher” is the old saying in both news articles and giddy Realtor posts.
What a sales pitch!
While I would love to celebrate this interest rate news as a beacon of hope for more affordable mortgages and a stronger home market, unfortunately, the assumption that falling interest rates drive higher prices does not hold up…and the data proves it.
It is logical to assume that as interest rates fall, buyers’ monthly payments decrease, allowing them to spend more on a home (or compete with a greater amount of buyers driving up prices), but when looking back in history – that is far from the case here in California.
In a previous 2019 blog post, I crunched some numbers on if there is a correlation between interest rates and home prices. Spoiler Alert: There is ZERO correlation between California home prices and interest rates.
Let’s dive into the data…
California History and Data
When researching, I went back decades to explore times when interest rates were rising or falling, and how median home prices performed in those environments.
The information was surprising. It debunked many assumptions about the correlation of prices/rates that others (and myself) blindly took as fact.
Take a look at various California real estate cycles and how prices and rates interact.
- 1972-1980:
- Interest Rates Went UP 7.40% to 12.46%
- Median Prices Went UP $28,810 to $99,550
- 1981-1989:
- Interest Rates Went DOWN 14.39% to 9.81%
- Median Prices Went UP $107,710 to $196,860
- 1990-1996:
- Interest Rates Went DOWN 9.74% to 7.58%
- Median Prices Went DOWN $193,770 to $177,270
- 2000-2005:
- Interest Rates Went DOWN 7.86% to 5.85%
- Median Prices Went UP $241,350 to $522,670
Do you see a pattern in these numbers?
That is a trick question because there is no pattern…AKA there is no correlation.
At the risk of being repetitive, let me simply restate what the data shows:
- Interest rates go up, prices go up.
- Interest rates go down, prices go down.
- Interest rates go down, prices go up.
Throughout California real estate history, there is no, or at least a very weak correlation between home prices and interest rates. Period.
And while it is important to note interest rates do play a factor in home prices, the real estate market is far more complex and affected by countless economic and demographic forces.
Remember: Buyers must consider much more than changing interest rates when deciding to purchase a home.
Conclusion:
It is understandable why many assume falling interest rates will drive home prices higher. I enjoy seeing the excitement from my buyers, sellers, and fellow Realtors that want to gear up for a strong market.
That said, one must look back at history and consider the assumption to be nothing more than a common misconception.
Lower interest rates will not be the deciding factor on if the home market goes higher, and history supports that statement as you saw above.
And it should not be the main reason for deciding to buy or sell a home.
Instead, both buyers and sellers should weigh a multitude of factors including but not limited to personal finances & income, major life events, economic conditions, local market dynamics and individual preferences.
The direction of interest rates simply do not drive the market in any way.
While interest rates might be a factor in your home buy/sell decision-making process, it is truly a holistic personal decision (involving many considerations) that only you can decide when you make the move.
Cheers.