Interest Rate vs Price |Which Should Buyers be Focused On?


Interest Rate vs Price - What's Going On?

Everyone has heard that interest rates are going to go up soon and then conclude that home prices will go down. Maybe but maybe not. There's more than a few things at play when analyzing the relationship between interest rates and price.

Another talking point making the rounds now is that prices are at an all time high, well at least in the Beach Cities, and therefore we are in a bubble. Again, maybe not exactly correct.

Let's start with the fact that at the previous pre-crash high, interest rates were on average  few points higher than today. So according to some analysis such as this one by Trulia, we would have to get close to or over 6% to start to see a major impact on price.

What may happen, as it often does, is lots of substitution going on. This can take the form of either alternate mortgage products or neighborhoods.

By mortgage product substitution we are referring to Adjustable Rate Mortgages (ARMs) vs 30 year fixed. We've even seen the return of the Interest Only (I.O.). These mortgage products are neither inherently good or bad and should be differentiated from the negative amortization no money down products we saw previously. Those were bad.

We are also seeing a lot of neighborhood substitution. Buyers priced out of Hermosa Beach and Manhattan Beach have turned to Redondo Beach. Now we are seeing Buyers priced out of Redondo looking at Hawthorne and Lawndale.

So unless a home is at the top end of the price strata there is a substitute buyer market in most price ranges,

One of the places we see this in Redondo Beach is in the higher end of Single Family Residences in both 90277-90278. What used to be a $1.5M property in East Manhattan Beach is now a large house in El Nido, TRW tract or elsewhere in North Redondo.

In South Redondo Beach the $2.5M property has been the replacement for the Manhattan Beach Tree Section. You can get a larger house, most likely closer to the beach and possibly with an ocean view in 90277.

Price May Suppress the Market More than Rates

This conclusion is fairly apparent to deduce.

At a higher price, a buyer needs a larger down payment, will have higher property taxes and will have a larger mortgage. As a general rule of thumb, interest rates going up 1% has less of an impact than prices going up $100K. 

So as either a buyer or seller, focus on price and don't get too distracted by rates.