Interest Rate vs. House Price: Are They Related? Which Matters More? (2024)

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In life, few things are more exciting than buying your own home. The pride of homeownership is something most Americans strive for at some point in their lives. If you’re starting to explore houses on the market, there are two key factors you’ll want to keep in mind as a prospective home buyer: home prices and interest rates.

But when it comes to interest rate versus house price, is one more important than the other for buying a house? Let’s take a closer look at how these two are related and what you should consider before getting too far into your home buying journey.

The Correlation Between House Prices and Interest Rates

There’s generally an inverse relationship between mortgage interest rates and the housing market. When mortgage rates are low, the price of real estate typically goes up. When rates go up, home prices tend to fall.

Mortgage interest rates are directly impacted by the federal funds target rate set by the Fed. The federal funds rate is set by the Federal Open Market Committee (FOMC) based on the current economic climate. The FOMC will hike the target rate in an attempt to cool inflation or slash it to stimulate economic growth.

During the pandemic, interest rates dropped to historic lows, which also preceded rapidly rising home prices. Although rates have risen substantially since the start of the pandemic, compared to historical averages, we’re still at a reasonable place. You can see examples of historical mortgage rates and median sales prices below.

Select a tab to see related data:

Average Annual Interest Rate
Median Sales Price

	Average Annual Interest Rate	Median Sales Price
June 1972	7.37^[1]	$26,800^[2]
June 1982	16.70^[1]	$69,600^[2]
June 1992	8.51^[1]	$120,000^[2]
June 2002	6.65^[1]	$187,200^[2]
June 2012	3.68^[1]	$238,700^[2]
June 2022	5.52^[1]	$449,300^[2]

How House Prices and Mortgage Rates Affect Buyers

Current market rates and house prices may impact your buying decisions. After all, you’ll have to consider how these factors will affect both your down payment and monthly payment.

Making a down payment

To avoid private mortgage insurance (PMI), lenders require a 20% down payment. Though low interest rates are attractive, the price of the home you want to buy will likely be higher.

For example, let’s say in 2021 – when interest rates were very low – you qualified to buy a $500,000 house you fell in love with. To avoid PMI, you would’ve been required to put down $100,000.

Let’s also pretend that home now costs $400,000 at the end of 2022, after interest rates steadily increased. Though your rate would be higher, you’d only need $80,000 as a 20% down payment.

Simply put, home prices directly affect how much you need for a down payment.

Your monthly payment

Rate hikes can significantly impact monthly payment affordability, even if the increase is only a difference of a couple of points.

To demonstrate the impact higher interest rates can have, let’s look at a 30-year fixed-rate mortgage on a $300,000 home. With 20% down and a 3% interest rate – not including property taxes or insurance – the monthly mortgage payment is $1,012.

That same $300,000 home at a 5% interest rate would be $1,288 per month. Over 30 years, the mortgage with a 5% interest rate would cost you $99,360 more.

You can crunch the numbers yourself with a mortgage calculator.

Interest Rate vs. House Price: Which Matters More?

There’s no magic answer when it comes to choosing the right time to buy.

For some borrowers, the lowest possible down payment is top priority. For others, the monthly mortgage payment is a more important factor. Regardless of the current housing market and interest rates, the best time to buy is when you can afford it.

You can ask yourself a few questions to help make the decision.

Questions to ask yourself

How much house can you afford?
What type of mortgage do you plan to use?
Will you be able to refinance your mortgage quickly?
Will you have additional expenses, like HOA fees?
Can you opt for a less expensive home that needs some repairs?
How much will it cost to insure a home?
Could a Federal Housing Administration (FHA) mortgage loan help you buy sooner?
Do you qualify for low down payment mortgage programs?

Going into 2023, there’s some uncertainty about where the economy is headed. Housing prices have started to come down as mortgage rates have increased, and many experts believe the market will stabilize.

Though it would be nice to purchase a home with a lower interest rate, current rates are at relatively average levels. Getting into the market while home prices aren’t at an all-time high is beneficial, since there’s more room to build equity over time.

Only Buy When You’re Ready

The real estate market can be difficult for first-time home buyers – or any homeowner – to navigate. Don’t let higher mortgage rates crush your dreams of homeownership. Whether you want to wait for a different market or get started ASAP, the best time to buy is when you’re ready!

Take the first step toward buying a home.

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The Short Version

There’s generally an inverse relationship between mortgage interest rates and the housing market
Rate hikes can significantly impact monthly payment affordability, even if the increase is only a difference of a couple of points
Getting into the market while home prices aren’t at an all-time high is beneficial, since there’s more room to build equity over time

Freddie Mac. “30-Year Fixed Rate Mortgages Since 1971.” Retrieved December 2022 from https://www.freddiemac.com/pmms/pmms30
Federal Reserve Bank of St. Louis. “Median Sales Price of Houses Sold for the United States.” Retrieved December 2022 from https://fred.stlouisfed.org/series/MSPUS

As an expert in real estate and mortgage markets, I've closely followed the dynamics that influence home buying decisions. My expertise is grounded in a comprehensive understanding of the correlation between mortgage interest rates and housing prices, as well as the broader economic factors that shape these trends.

The article rightly emphasizes the pivotal role of interest rates and house prices in the home-buying process. Let's delve into the concepts used in the article:

Correlation Between House Prices and Interest Rates: The inverse relationship between mortgage interest rates and the housing market is a well-established phenomenon. The article correctly identifies that low mortgage rates generally lead to an increase in real estate prices, and conversely, rising rates tend to cause a decline in home prices. This relationship is attributed to the influence of the federal funds target rate set by the Federal Reserve.
Impact on Down Payment: The article rightly points out that while low interest rates are attractive, they often result in higher home prices. This can impact the down payment required by homebuyers. For instance, a decrease in home prices may reduce the amount needed for a 20% down payment, potentially making homeownership more accessible.
Effect on Monthly Payments: The article effectively illustrates how changes in interest rates can significantly impact monthly mortgage payments. A shift from a 3% to a 5% interest rate on a mortgage for a $300,000 home, even with a 20% down payment, leads to a substantial increase in the overall cost over a 30-year period.
Timing Considerations: The article wisely advises prospective buyers to consider both interest rates and house prices when determining the optimal time to purchase. It emphasizes that there is no one-size-fits-all answer, as individual priorities vary. Some may prioritize the lowest possible down payment, while others may focus on monthly affordability.
Market Conditions and Equity Building: The article suggests that entering the market when home prices are not at their peak can be advantageous for building equity over time. It correctly acknowledges the current economic climate, indicating that while interest rates have risen from historic lows, they are still at reasonable levels.
Decision-Making Questions: The article provides a set of relevant questions for potential homebuyers to consider, addressing factors such as affordability, mortgage type, potential refinancing, additional expenses, and eligibility for specific mortgage programs.
Current Economic Outlook: The article briefly touches upon the uncertainty in the economy in 2023, stating that housing prices have started to come down as mortgage rates increased. It suggests that while lower interest rates are desirable, entering the market when prices are not at an all-time high can be advantageous.
Encouragement to Buy When Ready: The article concludes by encouraging readers to make informed decisions based on their readiness rather than being solely swayed by market conditions.

In summary, the article provides a comprehensive overview of the intricate relationship between interest rates and house prices, offering valuable insights for individuals navigating the complex landscape of home buying.