Interest rates and demand

Rising rates reduce affordability, but not always demand.

While historically low mortgage interest rates certainly helped fuel the housing rebound in 2012-2013, a spike in rates that occurred in May 2013 did not appear to impact buyer demand. Many buyers become even more anxious to buy when rates begin climbing, fearing that further rate hikes will push them out of the market entirely.

Rates are relative as well. In the mid-1980s, when mortgage interest rates were hovering near 15 percent, it was not unheard of for prospective homebuyers to camp overnight in bank parking lots to get promotional rates of 12.5% offered only to the first 200 applicants the following morning.

A change from 3.5 percent to 5 percent can make a difference in how much a buyer can spend for a home, but it will not force many buyers out of the market.

Take a look at the following chart which shows how mortgage interest rates have fared over time. This provides some perspective on today’s current low rates.