Housing prices and mortgage rates have very different factors driving the direction of both. If rates rise, will housing prices drop? I’m asked this question all the time. Many people assume that rising rates should cause housing prices to drop.
The truth is that no one can say for sure what’s going to happen with the housing market in the future. We know for a fact that both prices and rates are cyclical; but that’s because of all the many outside factors that influence the two markets. And to be sure, it’s important to remember that these are two very different markets.
Mortgage rates are tied to the Mortgage bond market
When demand for mortgage bonds drop, the yield on the bonds tends to rise and mortgage rates will follow suit. The demand for bonds tend to rise when Wall Street is in a slump. This causes the price for bonds to rise, so the yield drops and rates drop too. Conversely, when the bulls take over Wall Street, as we are seeing since the recent presidential election, institutions sell bonds and buy stocks. As bond prices fall, rates rise.
It would be an over simplification to say this is always true – there are always other factors that are part of this equation, but in general, WATCH WALL STREET! There is no doubt that when the Feds stop buying mortgage bonds to keep that market stable, mortgage rates WILL rise. The 10 year Treasury bond yield, which historically mortgage rates tended to mirror has risen more than 1% since the elections, and mortgage rates have followed though not quite as quickly. Mortgage rates bottomed at around 3.5% and that rate was available as recently as a few weeks ago. As of today, average 30 year fixed rate loans are available at 4.3%.
Housing prices are tied to supply and demand
Unlike mortgage rates, the price of housing is dependent primarily on supply and demand. When inventory is very low, as we have seen in Portland since about 2012, housing prices rise until inventory catches up, or demand drops.
Here in Portland the forecast is that housing prices WILL CONTINUE TO RISE for at least the next couple years. It will take that long for there to be enough inventory to meet the demand. Though, if mortgage rates rise dramatically, many potential home buyers will be priced out of the market.
Why is housing inventory so low in the Portland metro area?
- Migration – there are far more people moving into Portland than out. As of 2015 migration numbered approximately 112 people moving into Portland every day! Portland’s population is now at approximately 2.5 million residents and still growing. More recently we are hearing migration numbers have increased to closer to 150 new residents every day.
- Jobs and the economy – Industries are moving into Portland bringing some of their own employees with them, and boosting the economy by adding jobs for local residents. Recently, Amazon announced that they will be opening a giant warehouse in Washington county that will employ approximately 1000 people! Add this to Uber, Google, Airbnb, Ebay, plus all the smaller tech start ups, and you can see that there are jobs in this area, and people migrate to areas where employment is available.
- Climate – Unlike California and much of the southwest, Oregon has a fabulous moderate climate. Yes, it does rain approximately 141 days of the year, but most of those days we see some sunshine too. And the temperatures are moderate. We have few days below freezing or above 90 degrees. The rain keeps Oregon green and water prices low as compared to much of the country. 141 days of rain means we rarely have water rationing. There’s plenty of water to go around, even for those who like long showers.
- Competition from institutional buyers – with prices relatively low and on the rise, institutional buyers such as hedge funds find Portland a great place to invest so they buy up much of the lower priced housing; competing directly with home buyers who actually live here. Unfortunately they hold these properties as investments and drive up the rental costs along with the housing prices.
- Green economy – Travel and Leisure magazine ranked Portland the greenest city in America in 2015.
- Millenials are moving to Portland in huge numbers due to all the above factors and have been choosing Portland since around 2010.
All these trends are likely to continue which will continue to contribute to ever higher housing prices.