The Debate: Employment vs. Interest Rates

April 20, 2018

In recent months, I’ve commented on the local real estate market primarily from the standpoint of employment and its effect on demand and affordability. I’ve asserted that the recent run up in prices has been the result of a solid job market and a limited supply of homes for sale.

 

The Mortgage Rate Perspective:

Some readers of this column have offered a different view. Their argument suggests mortgage rates are the primary influence on the market, not employment. The assertion is without the historical low rates in recent years, buyers would not have had the purchasing power to drive prices up. Now that interest rates are on the rise, the negative impact on purchasing power will be the reason the market slows down.

 

The Proof:
There’s no doubt interest rates are a big contributing factor to market performance. Recent history proves it. Rising interest rates in the mid 2000’s set up the mortgagecrises in 2008. As rates rose many homeowners with adjustable rate mortgages could no longer afford their mortgage payment. At the same time, higher rates made qualification for new loans tougher for home buyers. The result was an increase in the supply, a decrease in demand, and a decrease in home values.

 

The Rebuttal:

As recent history proves the impact of interest rates, it also highlights the importance of a healthy job market. In the years following the mortgage crisis, interest rates went below pre-meltdown levels. However, at the same time, unemployment was around 10%. From 2010 to 2012, the market was in a rut despite favorable mortgage interestrates. It wasn’t until 2013, when employment numbers improved, that the housingmarket got onto more solid footing.

 

Closing Argument:

Mortgage rates are important and impactful. But most important, in my view, isemployment. Without income there is no affordability at any rate. That’s my view. I’minterested in yours. Please contact me so we can continue the discussion.

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