Falling mortgage rates make housing less, not more, affordable
If history is any indication, homebuyers should be careful what they wish for
From financial experts to would-be homebuyers, everyone seems to welcome an almost unanimously expected drop in mortgage rates in 2024.
But if history is any indication, those aspiring to buy a home should be careful what they wish for.
Creditnews Research studied how home prices historically reacted to changes in mortgage rates and found that falling rates typically make housing less affordable, offsetting any savings in financing costs.
Key findings
Between 1987 and 2023, house prices rose in 201 months, or 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;
In fact, housing prices and mortgage rates fell together only during the three major housing crises in that period—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.