What Lower Mortgage Rates Mean for Buyers and Sellers

What Lower Mortgage Rates Mean for Buyers and Sellers

Mark Twain was quoted as saying, “The reports of my death are greatly exaggerated.”

One could make the same case for the United States real estate market. Have there been tall peaks and low valleys? Yes. But every market has them.

Nothing goes straight up. We have to get back to the idea that a home is not an interest paying certificate of deposit. A house put more aptly is a home. So let’s take a deep breath and clear our heads of the financial news clatter and take a look at the affect of interest rates on buyers and sellers.

As Always, Let’s Examine the Data

When looking at the real estate market the myopic focus is normally on interest rates. Hands start wringing wondering and what the Fed is doing with rates?

Let’s ask ourselves this, do interest rates really make that much of a difference? They do. But not nearly as much as some would have you believe.

Here is a chart of real estate values versus interest rates since 1970. That would be 50+ years of comparative data, which should be enough a sample size, right?

You can hear the pundits declaring, “Real estate prices are at record highs and with interest rates rising this cannot continue. Prices must crash.”

Well, prices from 1975 to 1985 were, at that time, at “all-time highs” as well. So naturally they had to crash right? As we can see, they did not.

Instead when interest rates skyrocketed in 1980 home prices went up as well. Completely the opposite of what one would think.


And since that time, interest rates have taken a nosedive, and again the real estate prices have gone up.

Affordability is the Driving Issue

Banks will qualify buyers for mortgages based on monthly payments and what the bank believes the buyer can afford. Interest rates play a significant role in determining what those payments will be and what price a buyer can qualify for.

So what happens when interest rates rise?

  • Rising interest rates usually indicate a healthy economy, which is good for wages and allows borrowers to afford a higher mortgage payment.
  • Rising interest rates mean also mean higher inflation, which is good for real assets and should drive up home prices.

On the flip side, rising interest rates reduce affordability because fewer borrowers can afford the higher interest payments.

Lower Rates Means Prices are MUCH MORE Affordable Than the 1980s

Sometimes the reality of the “good old days” gets distorted in our minds. Let’s compare affordability today with the 1980s.

The average house in the beginning of 1981 would have cost $55,278. The borrower could have gotten a $49,750 mortgage with a 10% down payment.

The mortgage interest rate was around 15% with a monthly payment of $629.

So, the average borrower in 1981 would have paid approximately 53% of their average annual earnings of $14,352.

Now let’s fast forward to 2021. According to Statista, the average American income in 2021 was $75,447 with an average mortgage payments of $1,001 with an average home price of $397,100. That’s a tiny 15.9% the average of their annual earnings.

Is there any wonder the real estate market was red hot at the time?

With interest rates almost doubling let’s check in on 2022.

As of October 2022 the median household income is $78,813 while the average mortgage payment is $2,012 as rates have doubled. That’s 30.6% of their average annual earnings.

So you see, even though home prices have risen 752% since 1981, home affordability has DROPPED from 53% to 30.6% of average annual earnings.

What Do Low Interest Rates Mean for Sellers?

As we’ve seen, interest rates whether low or high do not stop people from buying homes. People need a place to live.

As we’ve shown by the statistics above, sellers will always have buyers unless there is something really wrong with the home. But even then, there are buyers who want to rennovate, but it may take longer to sell and price cuts or concessions may be required.

Speaking of price cuts, this normally happens when there is more inventory than buyers. It’s always a matter of supply and demand.

Where interest rates fit in that scenario is that higher rates and tight money may mean fewer “qualified” buyers. This can be due to a downturn in the general economy and/or more stringent qualification requirements. That means even a lower-that-average supply can still mean more supply than demand.

This can even happen in today’s low interest rate environment.

How fast do you need to sell? In a tight economic environment with a load of tech job layoffs, a home needs to be priced right and could take longer to sell as the foot traffic dwindles.


Sellers cannot be unrealistic thinking we are still in the craze where there were multiple bidders as soon as the listing hit the market. That is not normal.

Buyers are Going to Buy. Sellers are Going to Sell. Get the Financing Right!

Much like the ice bucket challenge, it looks as if that crazy market is over. Remember, the pendulum always swings back and forth, and at some time a homebuying craze will be back in some new shape or form.

In the meantime, if you are in the market and looking for a new home, contact your local Embrace Home Loans® office. We have dozens of programs that can help you get into your new home with the perfect loan that fits your unique needs.

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