What Happens to Home Prices When Mortgage Rates Fall

An aerial view from a drone shows houses in Miramar, Florida on January 26, 2021. Existing home prices rose to their highest level in 6 years, according to two separate indexes.

Joe Radle | Getty Images

The U.S. housing market cooled off sharply last year after mortgage rates more than doubled from their all-time lows. However, housing prices were more rigid.

Prices started falling last June but are still higher than a year ago. Now that demand seems to be returning to the market due to a slight cut in mortgage rates, prices are pulling back.

Latest data on US house prices in December were 6.9% higher compared to last year, according to CoreLogic. This was the lowest annual growth rate since late summer 2020. In April last year, annual price growth peaked at 20%.

Falling house prices reflected weaker housing demand as inflation, job cuts and economic uncertainty piled on the barrier created by higher mortgage rates. But mortgage rates began to fall in December, and prices reacted immediately. The cold snap continued, but not as much as in previous months.

“While prices have continued to fall since November, the rate of decline has been slower than the summer and is still only 3% of the cumulative price decline since last spring’s peak,” said Selma Hepp, chief economist at CoreLogic.

Hepp notes that some of the suburban areas that became popular in the early years of the pandemic and where prices soared are now undergoing more severe corrections. But she doesn’t expect it to last long.

“While the price slowdown is likely to continue until spring 2023, when the market is likely to see some year-over-year declines, the recent decline in mortgage rates has spurred buying demand and could lead to a more upbeat home buying season than many expected. Hepp said.

Monthly home buyer sentiment survey from Fannie Mae showed growth in January for the third month in a row. Consumers surveyed said they still expect prices to either fall or stay the same over the next year, but the share of those who think now is a good time to sell their home has increased from 51% to 59%.

Market surge in early spring?

Increasing inventory in the market will help bring more buyers back to the market. Oddly enough, real estate agents are reporting an earlier-than-usual surge in the spring market, with more visitors to open homes in the past few weeks. Some have also reported the return of the bidding wars.

Homebuilders in the country are also reporting rising demand. Home builder sentiment rose by for the first time in 12 months, the National Home Builders Association said. Builders reported an increase in current sales, customer traffic and sales expectations over the next six months. Lower mortgage rates are spurring new demand.

“As mortgage rates are expected to continue to decline later this year, affordability conditions are expected to improve and this will increase demand and bring more buyers back into the market,” said NAHB chief economist Robert Dietz.

The NAHB Housing Affordability Index started this year at its lowest level since it started tracking the index a decade ago. But lower rates are starting to change that.

If house prices continue to decline at the average rate of the past six months, annual house price growth could finally turn negative over the next three months, according to a new Black Knight report. It now takes almost $600 (+41%) more to make a monthly mortgage payment on an average-price home using a 30-year mortgage rate 20% lower than at the same time last year.

Mortgage applications to buy a home, the most recent indicator of demand, rose during January and the first week of February, although they are still lower than the same period a year ago, when rates were almost half what they are now.

“We are seeing clear signs of a January surge in purchase lending at lower rates and slightly lower home prices,” said Ben Graboske, president of Black Knight Data and Analytics. “But affordability is still a stranglehold across much of the market.”

Accessibility restrictions continue to deter first-time home buyers, says Fannie Mae's Doug Duncan.

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