Home Price Reduction and Rates

December 31st, 2022

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How do home price reduction and rates affect one another? I have clients who have reported seeing price reductions in the asking prices of homes for sale. This is the first time I have heard of this in years and years. So, are real estate values about to correct? It probably depends on where you live. And of course, as with many of life’s answers, the answer is a matter of degree. Some markets may be in for a large correction, some a small correction, and some markets may still experience price gains.

Are housing values dropping?

I have heard of some home shoppers say they feel home sellers owe it to homebuyers to drop prices just because of the interest rates increase.But is it sellers’ fault that interest rates are rising? Should they adjust the price of their home due to interest rates rising? Since housing values rose in part due to the previous massive reduction in interest rates, is it logical to expect sellers to drop their asking prices because of today’s higher interest rates? So maybe home price reductions are assured?

As interest rates rise, if home prices drop, that would help offset the rate increase to a degree but likely not enough to offset things equally. Below is a rough idea of what I mean when looking at various historical mortgage rates.

*DISCLOSURE: The below rates are only illustrative for calculation purposes and are not mortgage rate quotes. Mortgage rates are based on various things like credit score, property type, loan size, debt ratios, etc. Mortgage rates can also come with various fees like discount points, origination fees, appraisal fees, etc. To get an accurate rate quote with fees for your scenario click here.

  • $420,000 sales price

95% loan

$399,000 loan amount at 3.00% 30 Year Fixed = $1,682/month (not including taxes, PMI, and homeowners’ insurance)

  • $400,000 sales price

95% loan

$380,000 loan amount at 5.00% 30 Year Fixed = $2,039/month (not including taxes, PMI, and homeowners’ insurance)

  • $380,000 sales price

95% loan

$361,000 loan amount at 7.00% 30 Year Fixed = $2,401/month (not including taxes, PMI, and homeowners’ insurance)

As you can see in the above examples, as interest rates rise home price reductions can’t offset the interest rate increase. Even if the $420,000 home dropped $40,000 or almost 10% in price, you still see a large monthly payment increase as rates rise.

Based on the $420,000 scenario above, for your monthly mortgage payment to stay the same based on the formerly rock bottom 3% mortgage rates, home prices would have to drop 37%! See below to illustrate that:

  • $266,315 sales price

95% loan

$253,000 loan amount at 7.00% = $1,683/month (not including taxes, PMI, and homeowners’ insurance)

Of course, hoping that prices drop at all could be optimistic, let alone a massive 37% price reduction! However, home prices have gotten so costly some people don’t see how real estate prices can stay high given the increase in interest rates. Does there have to be some amount of home price reduction when rates rise?

Historical real estate values

We also must remember that rates have only been as low as 3.00% or 4.00% a few times in history. 6.00% or 7.00% mortgage rates are average in the history of our country. You can see more data on historical mortgage rates here: 220 Year History of Interest Rates.

With current mortgage rates being around a historical “average” I would think that would put a lid on big price increases, at a minimum. At most, it may signal an upcoming downward correction in  housing prices. And as I said earlier a housing price correction could be massive in some markets, and trivial in others. Time will tell!

To contact me to discuss your local housing market, mortgage rates, or other mortgage questions, click here to schedule a call or you can email me directly.

Brian Martucci is a loan officer for Capital Bank Home Loans, a division of Capital Bank, N.A. He has been in the mortgage industry since 1986 and has served in a number of roles, including loan processor, loan officer, mortgage broker, branch manager, and vice president. Brian Martucci – NMLS# 185421. His opinions do not necessarily reflect the opinions and beliefs of Capital Bank Home Loans or Capital Bank. Capital Bank, N.A.- NMLS# 401599. Click here for the Capital Bank, N.A. “Privacy Policy”.

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