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Home Prices vs. Mortgage Interest Rates

One of my clients recently asked about home prices and interest rates. Specifically we were talking about the Albany housing market in 2014 and where we think home prices and interest rates will be in 2015.

First off, let me just put out the disclaimer. I’ve been wrong before and I’ll be wrong again. So I won’t try to predict where interest rates are going to be in 2015 (5.0%, 4.75%, 5.5%?).  But the question arose will buying a house today cost more, less, or about the same in 2015. My answer is based on where the market has been the last two years, national economic indicators, and US real estate data. More than likely home prices and interest rates will rise in 2015, so whatever homes you see today will cost more in 2015 (both because of rising home prices and increase costs to borrowing).

Now its important to note, when interest rates rise, the cost of buying a home increases (your mortgage payment for the same mortgage is higher), and therefore usually housing prices erode.  Nationally over the last 12 months, rising prices have actually stalled and in some cases reduced housing prices. But locally we’re seeing a different story. (Note: there are usually momentary price drops during big interest rate spikes as we saw in Spring of 2014. However the yearly trend was much different).

Out of curiosity I went back to the 2013 year end real estate numbers. Albany County saw a 3% rise in home prices  in 2013, despite the 25-30% increase in mortgage interest rates (3.5% to 4.25%/4.5%). (see Albany Business Review). Prices only edged up 1.0% for the entire Capital Region housing market. In Albany County I’m guessing home prices edged up around 2%, in between the Albany County (3%) and Capital Region wide (1%) price gains.

Looking at the 2014 year to date (YTD) numbers for the Albany County real estate market, illustrates a continuous positive trend. So far in 2014, home prices are up 5% in Albany County and 3% in the City of Albany in 2014 (despite a price dip in April 2014). Buyers have just adapted to the step up in the interest rates from 2013 and adjusted expectations. The rise in Albany home prices is due in part to the continued positive economic growth, supported by relatively flat mortgage interest rates over the last 10-12 months.

The data is always a month behind. May’s numbers will be out by the end of this week so we’ll have another data point soon. Obviously rising home prices also will help sellers, so rising prices are not all bad news.