Do rising mortgage interest rates automatically reduce demand and trigger falling home prices? Find out what the experts and historians say.

Recently, the Federal Reserve hiked interest rates yet again in an attempt to slow down inflation. While the Fed doesn’t directly control mortgage interest rates, it does serve as a general indicator of how the economy (and thus the housing market) is performing. So how will rising mortgage interest rates impact home prices?

How Mortgage Interest Rates Affect Home Loans

Your mortgage interest rate adds to your monthly payment; in that way, it affects how much of a mortgage you can afford. The Federal Reserve does directly influence loan interest rates for things like credit cards (because these are based on lenders’ prime rate, which is based on the federal funds rate, which is the rate charged for inter-bank loans – got all that?). However, home loans are managed differently and use a different interest structure.

So why are experts watching Federal Reserve rates and mortgage rates so closely?

How Rising Mortgage Rates Impact the Real Estate Market

Although rising mortgage rates don’t automatically mean a slowdown in the real estate market, there are plenty of statistics that suggest a correlation:

• The Washington Press reports that after a recent rate hike, new home sales fell over 12 percent. Plus, pending sales dropped by 8% and existing home sales fell by 4.6 percent.
• PBS Newshour reports that 15% of buyers pulled out of pending deals in June – a total of about 60,000 people. Why? The article cited rising home costs that have started pricing many out of the market.

In our current market, though, this doesn’t necessarily mean that home sales will stall; there’s still a comparatively low amount of inventory to meet high demand.

However, the raise in mortgage interest rates does mean that mortgages will be more expensive. This can make owning a home even more difficult for first-time home buyers and lower-income families who have already stretched their housing budget as far as it will go.

So Will Home Prices Fall?

They might, but experts agree that we’re unlikely to see them return to their former levels. Researchers at Urban.org concluded: “Despite a sharp drop in affordability because of higher mortgage rates, home prices are unlikely to decline. Rather, affordability challenges are likely to persist.” Why? In addition to the low supply mentioned above, the same article states: “Sharply higher mortgage rates tend to slow home price appreciation and may weigh on housing market activity. But nominal home price appreciation does remain positive.” In other words, homes are currently worth more than they were a few years ago. And while we all know that can change, for now, plan on home prices staying high.

What does this mean if you’re looking for a mortgage? Well, it makes it more important than ever that you explore all your options. Talk to your local Mortgage 1 loan officer or use our Pro Snap digital mortgage tool to find out what programs might help you afford a home.