Lower Interest Rates Could Spell Higher Home Prices

If the Federal Reserve lowers interest rates this year as expected, the subsequent decrease in mortgage rates could increase homebuyer competition, raising home prices.

Redfin reports that a weakened stock market and looming trade wars lead many to expect that the Federal Reserve will lower interest rates this year. Any rate cut will translate into declining mortgage rates.

Over the past few decades, whenever mortgage rates have been in a period of extended decline, the housing market generally has reacted with increases in both price growth and sales growth, driven by increased homebuyer demand.

“While lower mortgage rates will inspire some people to list their homes for sale, so they can move and so they can capitalize on the increased demand, it’s unlikely to create enough new inventory to meet demand,” says Redfin chief economist Daryl Fairweather. “As a result, the healthy around-3 percent rate of home price growth we’ve been enjoying lately is likely to be short-lived. We could see price growth surge to a rate of more than 8 percent, on par with the growth we were seeing in late-2016. Sales could also rebound, with growth reaching double-digits compared with last year, but the growth would be temporary. In the long run, without a substantial increase in the supply of housing, we’ll see sales slow back down, but home prices will continue to grow at a stronger rate than we’ve grown accustomed to this year.”

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