Will Higher Rates Cause Home Prices to Drop?

Mortgage rates have risen by 0.80% from January 2021 (a record low) to an average of 3.45% for the week of January 13th according to Freddie Mac. Higher mortgage rates are leading some consumers to hope that home prices will drop. 

Unfortunately, that will not happen in metro Denver. Why? When you look at the number of showings per home on average (over 14 in December) tells me there are many times more buyers than sellers in our market. Let’s say there are 7 buyers for every home for sale and if the number of buyers drops by 20% there are still 5.6 buyers looking at every home. Thus, there will still be bidding wars. 

The last time mortgage rates increased substantially was during the last 4 months of 2018 when rates rose to almost 5% hitting a national average of 4.87% in November.This caused buyers to act quickly out of fear of rates rising above 5%. The greatest fear of human beings is FEAR and FEAR causes people to act quickly. 
In the first 8 months of 2018 the median sold price of all properties increased by 9.15% year over year and in the last 4 months median sold prices on properties still increased by 5.35% in the last 4 months of 2018. But, this was a drop of 41%. Could we see home prices not rise so fast now? 

Back in the last 4 months of 2018, we had an average of 1.77 months of supply. We averaged 0.49 months of inventory in 2021. So, inventory levels are down a whopping 72% from 3 years ago. Thus, I don’t think home price appreciation will slow much if at all this year unless mortgage rates go well over 4%. 

Finally, remember this…before Covid the lowest conventional 30 year fixed rates we had ever seen were 3.50% and we are very close to this rate still today.