When making a home purchase, most buyers will focus primarily on interest rate and home price. The latter is the principal amount you pay for the house, while the former is the amount you’re charged to take out a mortgage and pay over time as part of your monthly mortgage payment. Both play an important role in determining whether it’s a good time to buy and the type of house you can afford.
But when considering interest rate and home price, does one matter more than the other? Let’s look at how the two actually work together – along with some considerations to keep in mind as you’re house hunting.
Interest rates do affect house prices, and the two typically have an inverse relationship. When the Federal Reserve raises interest rates, home buyers can’t afford expensive houses, so the prices will start to drop.
And the reverse is also true – when mortgage rates are low, buyers have more money to spend, so home prices will start to rise. However, the housing market is constantly changing, so this is more of a guideline than a hard rule.
As interest rates rise, home prices don’t always drop as quickly or as significantly as anticipated, though. This makes the relationship between interest rates and home prices less distinct.
The COVID-19 pandemic caused interest rates to drop to historic lows, but rates didn’t stay that low. Mortgage rates have since gradually increased, but when you consider interest rates from a historical perspective, you’ll see that rates are still low by comparison. This means it’s not necessarily best to rely on interest rates alone to determine whether buying a home is a good investment.
The following chart provides an overview of mortgage rates and the median sales price of homes in March each decade since 1972. This information is based on data from Freddie Mac, the census, and the Department of Housing and Urban Development.