Between 1987 and 2023, home prices rose 80% of the time when mortgage rates fell, according to findings from Creditnews Research.
02/13/2024 11:05 A.M.
2.5 minute read
A recent report from Creditnews Research examined historical patterns in how home prices respond to fluctuations in mortgage rates. The findings indicated that when rates decrease, housing tends to become less affordable, countering any potential savings in financing costs.
Here are the report’s key findings:
- “Between 1987 and 2023, house prices rose in 201 months (80% of the time) when mortgage rates fell.
- House prices dropped only when the monthly drop in mortgage rates exceeded 0.4%.
- However, such drops accounted for only a total of 2.40% of the months measured.
- There were only three instances of house prices and mortgage rates falling together—the savings and loan crisis, the Great Recession, and the COVID crisis.
- Even when factoring in the time lag, mortgage rate drops resulted in house price growth over five times more often than in price declines.
- Considering chronically low housing inventory, lower mortgage rates aren’t likely to improve supply or housing affordability.
- Younger generations bear the brunt of low housing affordability, as nearly 1 in 5 millennials believe they’ll never own a home.”
According to the report, even if the Federal Reserve adjusts rates as anticipated by the market, it’s unlikely for mortgage rates to drop below 6.5% in 2024. This is due in part to the necessity for banks to increase staffing and enhance logistical capabilities to manage the higher demand of mortgage applications.
Additionally, banks are accruing a 5.4% return on the reserves they maintain at the Federal Reserve, which are considered risk-free. If the Fed reduces rates, banks are likely to be more inclined to allocate a portion of these funds towards mortgage lending.
“Lenders don’t really drop the primary rate as fast as a secondary rate goes down because they’re not going to be able to deal with the added volume of inquiries until they add staffing,” said Jay Bacow, co-head of securitized products research at Morgan Stanley, on a recent episode of the firm’s Thoughts on the Market podcast.
Furthermore, a December report from Creditnews found that a mere 6.4% of existing mortgages carry interest rates surpassing 6.5%, with over two-thirds of mortgage holders having secured rates below 4%.
This implies that individuals contemplating the sale of their homes would likely be transitioning into higher-priced houses with elevated-interest mortgages, even if they manage to secure one at the 6.5% threshold. As a result, economists at Morgan Stanley and Redfin anticipate only a marginal increase in housing supply, just enough to potentially cause a 2-3% dip in prices. Despite this, in comparison to the substantial 40% surge in prices since the onset of COVID-19, this provides little solace for prospective buyers.
“The affordability improvement that we were expecting to see over the entire course of 2024 is something that we’ve only seen seven or eight other times in the past 40 years,” Morgan Stanley’s housing strategist Jim Egan said on the podcast. “In most of those instances, sales volumes actually fell during that first year of affordability improvement. When you combine that historical experience with the fact that despite this improvement in affordability, it’s still very stretched and for-sale inventories are still very low.”
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