How do mortgage rates affect house prices


How do interest rates affect home prices? 

There are many who answer the question "When is the best time to buy a home?" with "When you need a home". 

This is a completely valid answer. However, the larger question remains, "what drives housing prices and when should I buy?".  

"Supply and demand" is the general answer from the industry which is another completely valid and accurate response. We see below another aspect of what drives housing prices. During the past few years of artifically low interest rates we have seen an influx of investment money into real estate.  With poor returns on so called traditional investments many have turned to real estate to augment their portfolios resulting in an increase of "amateur landlords" or those who have used equity in thier principle residences to leverage and buy a second property to build future wealth. This has been a significant driver of pricing which has put stress on the industry. This increase of investment money has also resulted in an increase in rental costs and more recently, as interest rates climb, landlords struggle to keep their investments liquid.      

As seen below there is a correlation between low interst trends and housing prices. The question is," How will the return to normalized interest rates affect pricing and future rental and purchase costs to consumers?". Will the upward pressure of interest costs push leveraged home owners out of the market and open more oportunities for user purchasers? Time will tell.