NEW YORK–In a conclusion that sounds hugely counterintuitive, a new report has concluded that history shows lower mortgage rates make housing less, not more, affordable.
Noting that everyone from buyers to sellers to lenders are prepared to welcome lower loan rates in 2024, Creditnews Research said in releasing its findings, “…If history is any indication, those aspiring to buy a home should be careful what they wish for. “
According to Creditnews Research, it 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.
“Between 1987 and 2023, house prices rose in 201 months, or 80% of the time, when mortgage rates fell,” the company said. “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.”
‘Aren’t Likely to Improve’
The company said its research found only three instances of house prices and mortgage rates falling together: 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,” the company said. “Considering chronically low housing inventory, lower mortgage rates aren’t likely to improve supply or housing affordability.”
Creditnews Research also noted younger generations are bearing the brunt of low housing affordability, as nearly one in five Millennials believe they'll never own a home.
Additional Analysis
In releasing its findings, Creditnews Research that experts argue that there’s a lag effect between mortgage rate changes and their impact on housing prices.
“This makes sense, as buying a house is a process that can take months to complete, involving the decision to buy, choice of a house, securing a mortgage, and signing a contract,” the company said. “But even with the two-year lag factored in, mortgage rate declines were associated with house price growth over five times as often as they were with house price declines.
Mortgage rates are not likely to go lower than 6.5%
“Even if the Fed cuts rates in line with the market's expectations, it is unlikely that mortgage rates will fall below 6.5% in 2024,” the analysis continued. “That’s partly because banks need to ramp up their hiring and logistics to deal with a higher volume of mortgage demand.”
Another Reason for Floor
Creditnews Research said there’s another reason for the 6.5% floor.
“Currently, banks are earning 5.4% on the reserves they hold at the Fed, which are risk-free,” the analysis states. “If the Fed cuts rates, including the rate it pays on reserves, by a total of 1.50 percentage points, as the market expects, banks will be more willing to shift some of those funds into mortgage lending.”
A 6.5% mortgage rate is considered the minimum necessary to entice banks to take the extra risks that rates might rise again, making their 6.5% mortgages less valuable because rates and prices on debt instruments move inversely, Creditnews Research added.
The Relationship
Depending on how much lower mortgage rates spur demand, they can have a “crushing effect” on the affordability of a home, according to Creditnews Research.
“Here’s a real-world example comparing 2013 (after the housing market had mostly recovered from the Great Recession) and 2022 (during the Covid housing bubble),” the company stated. “In 2013, the average house price in the U.S. was about $240,000, and the average mortgage rate was about 3.5%. With a standard 20% down payment, that meant the buyer needed a $192,000 mortgage. Adding in tax and insurance, the average house (assuming the down payment came out of savings) cost $1,208 a month.
“In 2022, the average house price was about $360,000, and the average mortgage rate was about 2.6%,” the analysis continued. “With 20% down, the buyer needed a $288,000 mortgage to buy the same house.
Including tax and insurance, the house that cost $1,208 a month for a buyer in 2013 now costs $1,672 a month. Even if prices do not rise, after a 50% run-up in the price of the average house between 2013 and 2022, a fall in mortgage rates is not going to make much of a dent in affordability.
Small Savings
“A $500,000 loan at the 7% mortgage rate being offered in late 2023 would mean a $3,300 mortgage payment before taxes and insurance. If rates do settle at 6.5%, that would mean a $3,160 mortgage payment—a savings of only $140 per month,” the analysis continued.
The full report can be found here.
The Very Best Daily News Email in Credit Unions. For Free.
The biggest, best and freshest news reporting in credit unions remains free! Each morning CUToday.info delivers its daily Fresh Today news update offering the latest headlines and breaking news right to your email, with the easy-to-read headlines format allowing you to click on the stories that interest you most in order to learn more. So stop paying those bank-fee-like subscription prices from other so-called “news” publications!
If you haven’t yet signed up for the new email solution on which CUToday.info has partnered with ResponseGenius, you can do so here. Signing up requires less than one minute of your time—and it’s free!
Please note that after signing up you may need to go to your Spam/Junk folder and mark the morning headlines email as safe. CUToday.info does not provide its list of readers and emails to outside parties, and we will not be contacting you to sell you an extended warranty or sending you any links so you may cash in on an inheritance you didn’t know was coming.
And did we mention it’s free?