Home prices have risen by double-digits in recent months, and that’s all the more bewildering during an economic crisis like the one we’re going through now.
Experts say the reason could be the 30-year fixed-rate mortgage, which hit a record low average of 2.81% just last week.
“The combination of what could be the lowest mortgage rates of our lifetimes, a paucity of inventory, and a desperate rush of buyers has resulted in median home list prices hitting new records,” realtor.com reported.
Home prices were up 12.2% in the week ending October 10 compared to one year ago, according to data from realtor.com.
Freddie Mac’s chief economist Sam Khater said it was unprecedented to see such a massive run up in home prices during a recession. “It’s clear that rates matter even more than unemployment rates,” he said.
While the low mortgage rates do help buyers afford higher priced homes, they’re also leading to a frenzy in the real estate market as people rush to lock in such advantageously low rates. Home buyers who purchase a median-priced home at $350,000 will pay around $80 less per month than someone who bought a $315,000 home at the higher interest rate of 3.69% one year ago, realtor.com’s analysis shows.
The thing is, affordability rises as mortgage rates go down. But, buyers do need to put up a bigger down payment when prices increase.
Higher home prices with higher rates are not a good combination though, analysts point out. Zonda’s chief economist Ali Wolf told realtor.com that if mortgage rates were to rise by half a point, hundreds of thousands of people would probably not be able to afford a median priced home any longer. It would be first-time buyers that tend to have smaller budgets that would suffer the most.
The good news then is that most economists believe mortgage rates will stay low throughout 2021. Meanwhile, expect home prices to remain elevated, or even rise further, as buyer demand remains high and inventory is at its lowest level in years.