Housing Prices Are Rising Along With Mortgage Rates. Here’s What That Means

In a somewhat odd trend, rising mortgage rates are moving in tandem with increasing housing prices in many markets, leaving some housing analysts to explain this non-customary situation.

Typically, rising mortgage rates result in leveled off or even falling home prices because fewer people can afford to buy and typically that trend eventually cools a torrid housing market.

But so far that hasn’t happened. John Beacham, CEO of Toorak Capital Partners explains why. 

“Increasing borrower incomes and confidence levels along with a continued housing shortage are two factors that so far have offset the impact of rising mortgage rates on housing demand,” he says. 

Homebuyers Continue to Pay Higher Premiums

That, in part, explains data released this week by Florida Atlantic University that showed most overvalued markets’ prices still are climbing despite the increasing mortgage rates, which last week reached their highest level in more than three years.

In all 100 markets surveyed by researchers at Florida Atlantic University and Florida International University, buyers continue to pay higher premiums—that’s the difference between where home prices should be based on historical trends and where they are now.

Metros with ‘Pricing Crowns’ Are ‘Reaccelerating’ Higher

Two months ago, Los Angeles; Provo, Utah, and other metro areas in the Western part of the country developed “pricing crowns,” an indication that those housing markets could be slowing. But home values have since accelerated again, prompting concern that a looming downturn in some areas could be worse than expected.

“Eventually, mortgage rates will slow down home prices, but it hasn’t happened so far,” said Ken H. Johnson, an economist in FAU’s College of Business. “We should not see rapid upticks in prices as mortgage rates rise. It’s that kind of exuberance that led to past housing downturns.”

Boise is the nation’s most overvalued housing market, as it has been since the researchers first released their rankings last summer.

At the end of February, Boise buyers were paying an average price of $513,849, even though historical trends indicate the average price should be $291,389. That 76.34 percent premium is well ahead of No. 2 Austin, Texas (64.80 percent).

Charlotte entered the top 10 overvalued markets for the first time with a premium of 50.14 percent. February’s average home price in Charlotte was $353,106, although a history of past sales suggests that price should be $235,188.

“Charlotte’s significant and rapidly growing premium is similar to other Southern metros that are all experiencing fast price appreciation,” said Eli Beracha, of FIU’s Hollo School of Real Estate.

“The drivers of this appear to be large population increases in these areas combined with a significant shortage in housing inventory.”

Florida Home to Most Overvalued Markets

Each month, Johnson and Beracha rank the most overvalued housing markets of America’s 100 largest metros, similar to the popular S&P CoreLogic Case-Shiller home price index. Johnson and Beracha incorporate average or expected price changes and provide an estimate of how much a market’s housing stock is over- or undervalued, relative to its historic pricing. The data covers single-family homes, townhomes, condominiums and co-ops.

Six Florida metros, led by Lakeland, all rank among the nation’s 25 most overvalued markets with premiums of more than 40 percent. The Miami metro, with a premium of nearly 25 percent, remains the least overvalued market in the Sunshine State.

As the US housing market cools, metros with strong population gains and shortages of homes for sale will fare best, although those markets will continue to struggle with affordability, the researchers predict. Metros with flat or falling populations and more available homes for sale could face price declines, making those areas more attainable for young families and first-time buyers.

A Lag Time Between Closings, Rate Increases 

In the meantime, rising mortgage rates will likely continue to move in tandem with increasing housing prices in many markets which could introduce some unforeseen instability in valuations, according to Allan Swaringen, president & CEO of JLL Income Property Trust, tells GlobeSt.com. 

“Reported housing values are based on lagged data of closings where price was often set between buyers and sellers months ago, along with usually a previously locked-in interest rate,” Swaringen said. “The point here is that interest movements are more volatile and real time, while there often is a quarter or two lag before actual borrowing rates impact buyers’ qualifications for a mortgage.

Swaringen agreed that the country’s ongoing housing shortage is a factor.

“It’s clear that our nation’s housing stock, for both single-family homes and multi-family rentals is still lagging demand,” Swaringen said. “Therefore, prices are continuing to rise despite the recent increases in mortgage rates. It is also worth noting there were double-digit national rent increases for apartments last year.

What will be interesting, he said, is to see if housing prices cool a bit into summer months as some demand may be dampened due to people being priced out of homes amid the more recent runup in mortgage rates.