Declining Interest Rates and Rising Home Prices

One of the biggest stories in real estate for 2020 has been rising residential home prices, and its impact on affordability. The increase in home prices has occurred even in the challenging economic environment created by the global COVID-19 pandemic. In fact, the National Association of Realtors (NAR) reported today that the median price of existing home sales increased 14.56% to $310,800 (as of 11/30), from $271,300 a year ago link to other site. As most home buyers rely upon a mortgage to purchase a home, it is important to consider how changes in mortgage rates have contributed to the year’s price change.

The weakened economy has led to declining interest rates, which makes the total price of home ownership (affordability) more attractive. All things being equal, lower interest rates can lead to higher home prices. This is due to the fact that the majority of home purchases (over 60%) are completed using a mortgage. The monthly payment of this mortgage is calculated as the sum of the principal and interest payments at the borrowing interest rate. As the interest rate declines, the interest service component of a borrower’s monthly payment decreases, which makes homeowners more comfortable with an increased principal payment. This change can contribute to home price increases in a declining interest rate environment, and declining home prices in a rising interest rate environment.

Looking at the data, the 30 year national average mortgage rate decreased 79 basis points to 2.94% as of 11/30/2020 (from 3.73% a year ago) according to data from link to other site. As stated above, we know that the median price of existing home sales was up 14.56% to $310,800. Assuming a 20% down payment, which is a standard requirement for borrowing in most real estate purchases, the table below illustrates how the median home buyer’s monthly payment has changed. Interestingly, the median borrower’s monthly payment has increased 3.75% to $1,040.25 given these changes:

As of11/30/201911/30/2020% Change
Median Home Price per
NAR Existing Home Sales
 $  271,300.00 $  310,800.00+14.56%
Down Payment (20%) $    54,260.00 $    62,160.00
Mortgage Length (30 Years)360360
30 Year Mortgage Rate per National Average
Monthly Payment
(Principal and Interest)

The table helps demonstrate how decreasing mortgage rates can contribute to a significant increase in median home prices. Home affordability (as represented by the monthly payment) is dependent upon both the price of the home and the mortgage rate. Looking at this simple mortgage calculator, it is interesting to observe that the monthly payment of home borrowers has increased significantly less than the year’s 14.56% increase in median price of existing home sales.

The Bureau of Labor Statistics link to other site reported recently that average hourly earnings increased 4.4% year over year as of November 30. The 3.75% increase in monthly payments reflected is not significant given this increase in wages. However, it is significant for the 9,834,000 that are still out of work since February and are unable to participate in this segment of the economy.

Washington Trust Bank believes that the information used in this study was obtained from reliable sources, but we do not guarantee its accuracy. Neither the information nor any opinion expressed constitutes a solicitation for business or a recommendation of the purchase or sale of securities or commodities.

About The Author

Nick is a Vice President and Portfolio Manager for Washington Trust Bank's Wealth Management & Advisory Services. With nearly 20 years experience in portfolio management, he strives to bring a holistic approach to meeting our clients' goals as it relates to their investment portfolios. Nick partners with Relationship Managers to bring disciplined, comprehensive, client-focused solutions as he works with the Portfolio Management team to structure client portfolios.