November 3, 2023

Wells: History lesson – Mortgage rates do not drive prices down

With mortgage rates recently hitting a 22-year high, a common piece of advice heard by would-be homebuyers is to sit back and wait out the storm. After all, with mortgage rates up and housing sales down, home prices ought to go down as well.

Right?

Not so fast. Previous experience tells us otherwise. Anyone advising you to wait for prices — or mortgage rates — to start falling is not paying attention to history.

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Consider the last time interest rates reached this level. It was the summer of 2001 when the average rate on a 30-year fixed mortgage was 7.24%. Homeowners in the Fort Collins-Loveland area had just experienced a hot 10-year stretch of home price growth, adding about 120% in value to the average-priced home.

A common argument heard at that point in time: With rates this high, and after the recent run-up in values, home prices had to start going down. But a far different story has unfolded. Home values —  despite some dips along the way, primarily due to the Great Recession of 2008-2009 — have maintained a mostly upward trajectory.

According to analysis from the Federal Housing Finance Agency, a home that sold for $200,000 in the Fort Collins-Loveland area in the summer of 2001 is now worth about $575,000, an approximate increase of 187.5%. 

My mentor, Larry Kendall, co-founder of The Group Inc. in 1976 and a 50-year veteran of the Colorado real estate industry, contends that angst over local housing prices is not a new phenomenon.

“I’ve continuously heard that housing is too expensive and can’t go any higher,” Kendall said. “I remember when The Group Real Estate sold the first house in Fort Collins over $100,000 and everybody was shocked. Look around the country and the world. In most of the desirable areas, home prices are still higher than here.”

Kendall offers a reminder that the 50-year average for a 30-year fixed rate is 7.76%. He believes that as homebuyers get used to the state of interest rates, they will move forward with their homeownership plans, even if that means selling an existing home and letting go of their 3% mortgage rate.

Larry’s own homebuying experience is a case study:

He tells how he and his wife bought their home in 2001 when interest rates for 30-year mortgages were at 7%. They took a five-year adjustable-rate mortgage at 5%, then refinanced later at a lower rate. They didn’t let the prevailing interest rates hold them back.

As Larry said, “Our attitude was, ‘It is what it is.’”

Larry explained that today’s attitude is different because people have become obsessed with statistics in the wake of the hot market of 2020-21. People fixated on how many offers they got for their house, how much their home sold for above list price, or how low of an interest rate they got on their loan.

“Following housing has become like following the stock market,” he said. “We lost perspective on why you buy a home — a place to live, raise a family, and create memories.”

The availability of homes for sale in the market is limited by the large volume of homeowners who are holding on to mortgages with interest rates below 5%. As Larry pointed out, those owners will begin to let go of their old mortgages and look for a different home when they realize life must go on. They could be motivated by a life event (marriage, a new job, a growing family), or by seeing the price of their dream home continue to rise.

As I’ve said before in this space, when people start to realize that putting their dreams on hold is a bad idea, they will reconsider their reasons for buying a home and look at the benefits beyond their financial gain.

Brandon Wells is president of The Group Inc. Real Estate, founded in Fort Collins in 1976 with six locations in Northern Colorado. He can be reached at bwells@thegroupinc.com or 970-430-6463.

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