When do rising interest rates and a healthy real estate market intersect?

We often obsess over mortgage interest rates when we are about to buy a home or refinance our mortgage. But how do interest rates impact our housing market? What does an increase of 1% mean, such as we have seen since the Federal Reserve started raising the funds rate in December 2015? It seems logical that healthy supply (the sellers) and demand (the buyers) in the housing market dampens with rising rates.

Cory Stevens, a principal broker with Berkshire Hathaway, thinks that the link is weak right now. He points out that we are still in a historically low interest rate environment. “Anyone under 40 years old has never seen high interest rates on homes. 30-year fixed mortgages hit 17% in the early 1980’s. The roller coaster of real estate prices in the US, over the last 20 years, has had little to do with rates. Supply and demand for homes is much more affected by the given locale and the replacement cost of developing new homes.”

So it is still about location, location, location.

It would take a substantially bigger hike in rates to change demand. At most risk in a rising rate environment would be the lower income buyer, says Cory. “That small ½ % or 1% increase to interest rates can mean the difference between being approved for a loan or being denied. Higher income buyers have the ability to either pay a higher monthly payment or move additional cash from other investments, to keep the LTV lower and receive the best rates and monthly payments.”

But if only divining the Federal Reserve’s next hike, and its impact on mortgage rates, was that simple.

Your mortgage rate is based on what the Federal Reserve does but also on what’s happening in the bond market. The mortgage rate changes each day based on the 10 Year Treasury Bond prices and yields. Then consider Fannie Mae and Freddie Mac, the two government agencies charged with buying mortgages from banks, giving banks the liquidity go out and lend again. How much Fannie and Freddie are buying also factors into mortgage rates.

We can save the deeper lesson on the relationship between interest rates, bond prices and our government for another day. But consider this – while the Fed’s funds rate has gone up in 2017 by 0.50%, the 30-year mortgage rate has moved from 4.20% in January to 3.90% in October. In a rising rate environment, it has gotten cheaper to take out a mortgage.

As of today, October 9th, per the Wall Street Journal, here are the rates for the commonly used types of mortgages:

30-year mortgage, fixed: 3.93%

15-year mortgage, fixed: 3.21%

Five-year adjustable mortgage (ARM): 3.54%

Jumbo mortgage, over $424,100: 4.44%

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