by Michael Dreyfus
Newsflash. Mortgage rates are on the rise, hitting above 4 percent last week for the first time in more than a year. Gone for now are the all-time-low 30-year, fixed, 3-percent rates that had us all running to our brokers to refinance in 2012.
How are these rising interest rates going to affect the housing market?
The short answer is: not the way you might think.
Logic seems to dictate that rising mortgage rates would bring the cost of real estate down in price because sellers would need to make their home prices affordable to buyers paying higher mortgage rates. Historically, however, this has not been the case. According to Yale economist and S&P/Case-Shiller Home Price Index guru Robert Shiller, "There is not a tight fit at all between the two: High mortgage rates do not translate automatically into low home prices."
The reasons for this seeming illogic are actually pretty logical, especially when you apply them to real estate in the boom town of Silicon Valley. Rising mortgage rates typically signal an improving economy, resulting in higher wages and rising inflation. People are earning more, so they can afford to spend more on their homes.
Another reason home prices don't necessarily come down with rising interest rates is that sellers are simply not always prepared to bring the cost of their home down. Whether they can't afford to or are unwilling to take a loss, most homeowners are going to buy another home after selling theirs. When they do, they're going to be stuck with higher interest rates just like you, and we can assume they don't want to buy a lesser home than the one you're hoping to buy.
With this in mind, if you find a home that's right for you, I would suggest that you refrain from refraining. Don't wait around for rising interest rates to bring housing prices down. It's not going to happen. Since 2009, besides one brief three-month blip, average monthly 30-year fixed mortgage interest rates have been at or below 5 percent. This is completely unprecedented: average rates never even hit 5 percent prior to 2009. So what we consider "rising interest rates" are still pretty darn low. And historically, once interest rates are on the upswing, they swing up quickly.
If I haven't put a spring in your step yet, here's another newsflash. The Case-Schiller index reported this month that house prices have returned to 2003 levels across the country. This combined with a robust local job market and a bullish stock market mean we are even less likely to see local housing prices go anywhere but up.
I absolutely stick to my golden rule that you should let the house, not the market, decide for you when making a home purchase -- in other words, don't buy a home you have serious reservations about because you feel like you just have to buy something. But if you do find a home that is right for you, act now. By waiting for a downtick in the local real-estate market, you might just wait yourself into a market with higher housing prices, higher interest rates, and possibly even lower inventory as rising interest rates create a flurry of buying activity.