Do Higher Mortgage Rates Mean the Housing Market Is Going to Crash?

As interest rates have risen, there's been more discussion of what these rates will do to housing prices. After all, higher interest rates mean higher mortgage payments, which means that people can't afford to pay as much for a home (given the same amount of income).

So of course, some people have argued that this means housing prices are going crash 30%. But that's not necessarily the case, because the reality of housing prices is more complicated than that.

Historically, increases in interest rates have actually seen a slight increase in home prices (see the graph below). Which is the opposite of what most people would assume. Even fairly rapid rises in mortgage rates saw positive price appreciation for homes. Why is this?

The key thing to remember is that both home prices and interest rates are affected by similar economic variables. Most significantly, inflation. When the economy is strong, inflation tends to be higher. A strong economy means more people have jobs, workers are seeing wage gains, and consequently, there's a lot of demand for housing. Interest rates tend to rise in response to this. And so do housing prices.

Now, the correlation isn't super strong. But it's a far cry from that doomsday scenario that a pen and paper calculation would project. So rest easy. When it comes to buying or selling a home, there are more important (and more knowable) factors to consider.

For instance:

• Do you plan to live there permanently?

• Can you cover the payments comfortably without sacrificing your other goals?

• Can you rent it out if you had to move?

• How much will maintenance and property taxes cost? HOA fees?

• Is it your dream home?