Fannie Mae finds increasing rates have little effect on home prices.

If we’re listening to Fannie Mae, the jump in mortgage interest rates over the last weeks will have little or no impact on home prices.  The mortgage giant released a report that studies the history of interest rates and the housing market all the way back to 1990, concluding that higher rates may slow down the number of home sales but no affect appreciation or the prices of homes.

"History suggests that interest rate increases at the level recently witnessed will not stop the current housing recovery," the report stated.

The comprehensive study of mortgage rates, home prices, and sales date, illuminated two times periods where rates jumped, October 1993 through 1994, when rates rose to 9.2% from 6.8%, and October 1998 to May 2000, when rates jumped to 8.5% from 6.7%.  During both time periods home prices remained relatively level, with little, if any, decline.

According to Mark Palim, who headed the Fannie Mae study: "What we see through the ups and downs of rate changes is that sellers are reluctant to lower prices. Homebuyers were also willing to find ways to stretch their resources, often by switching to adjustable rate loans, which kept payments affordable for the first few years then were adjusted higher.”

Rates and home prices follow economic trends, so when the economy heats up rates rise but so do employment numbers and incomes, resulting in people having the dollars to buy homes, despite the interest rates.

When rates are low it’s usually because the economy is going through a down phase and the Fed is trying to stimulate growth, so even though rates are low, people don’t have the dollar bills to purchase homes. 

However some economists and real estate experts stress caution, and predict that the 1+% rate increase since May, to 4.51%, will cool consumer confidence in the housing market, and slow growth.  One thing that no one can argue is that rates are still measurably lower than the historical average of more than 6%, and with home prices starting to appreciate out of unprecedented recession-levels, we may have found that perfect sweet spot where homes are desirable, affordable, and the money to buy them is still cheap.