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Mortgage Rates and Home Prices
Does Cost of Money Lower Home Prices
Smart money recently had a nice article on historical home price vs. mortgage rate increases. They point out that former Fed Chair Paul Volcker raised the Fed funds rate to beat back severe inflation.The 30 year mortgage rates went from 11% in June 1979 to over 16% by April 1980, more  than 21% over the period ended March 28, 1980. The effect on house prices? Amazingly, They rose more than 15% from 1979 to 1981.Its counter intuitive to think that home prices could increase alongside the cost of borrowing. You would think that price would drop over time to accommodate higher buyers cost. But history says no, not necessarily. Its part of the whole that affects price. You have to consider perception (the stuff of boom busts, inflation and jobs. We shouldn't assume that higher rates outprice buyers and lead to lower home prices. And its probably why historic low rates havent turned this market around.
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