Housing prices continued to increase in 2016 despite a sharp increase in interest rates during the second half of the year. The median housing price increased 7.85% during the year after falling slightly in 2015. In total, median home prices have increased nearly 50% from the low five years earlier.
Housing prices are influenced by a number of factors. Some of these have had a positive impact on demand for housing while others have switched to having a negative influence. Perhaps the most commonly cited factor affecting housing prices is interest rates. It is common sense that higher interest rates will lead to a higher mortgage payment for a given mortgage balance. This may price some buyers out of the market, thus reducing demand. However, during past periods of increasing interest rates, such as the late 1960s and mid to late 1970s, housing prices increased. Clearly there are additional factors at work. For example, an increase in household income can offset the negative impact of rising interest rates. In this case, households can afford to pay higher mortgage payments because their incomes have kept up with or outpaced the increase in mortgage payments. This makes household income an important data point to follow for an indication of the health of the housing market. Recently, wages have shown some signs of increasing at a faster rate, which may allow housing prices to continue to increase.
Another factor that can have an important impact on housing prices is the supply and demand for homes. We measure supply by examining new home permits and measure demand by measuring the pace of household formation (new households). Recently, the pace of household formation has exceeded the growth rate in new home permits. In other words, the supply of new homes has not kept pace with the increase in demand. This is a positive development for housing prices as excess demand may force buyers to offer higher prices to purchase a house when the supply in their target area is limited. This is often the most important factor affecting housing prices.
Therefore, while rising interest rates may slow the pace of the housing recovery, the mismatch between supply and demand may continue to push prices higher as long as economic growth continues and household incomes continue to increase.
However, as the saying goes “all markets are local” so it is important to assess the characteristics of your local market before purchasing a home or investment property.