Are Home Prices Dropping Due To Rising Rates?

How the recent price reductions are a correction and not a pullback.

The market has been wild over the last couple of months. I want to make sure you're informed about all the changes so you can make an educated real estate decision. Today, I invited Ryan Nelson, our loan officer and one of the top producers here in Arizona, to share his expert insights about the market and what’s going on with interest rates.

In the last 90 days, we've seen around a 1.5% to 2% increase in interest rates. According to Ryan, since the start of 2020 and for the last 15 years, rates have been in a range of anywhere from 4% to 8%. During the pandemic, rates dropped to around 2% to 3%. It was a once-in-a-generation thing that probably will never happen again. However, at the start of 2022, rates have been in the range of 3% after coming out of the COVID effect and have continued to rise.

"Rates are forecasted to come back down at around 5% next year."

Ryan also mentioned that during the summer months, rates were about 5% and are currently at 6% to 7% as a result of the Federal Reserve rate hikes to slow down inflation. Furthermore, rates are forecasted to come back down and be around 5% next year. It may take some time to get there, and will probably happen once we start to see evidence that inflation rates are slowing. Lastly, Ryan emphasized that rates are temporary; however, housing prices are another story.

Currently, there has been a pullback in home prices, but this is due to prices already being hyperinflated—there’s been around a 53% to 56% increase in home prices in the last two and a half years. This is a ridiculous amount of a value increase in any given property. In the last 90 days alone, I've seen around 16% to 18% pullback. I wouldn’t really call it a pullback; it’s more of a correction. Many sellers thought their houses were worth a lot of money, but then the buyers suddenly had more options and weren't willing to pay that much anymore. The only option for the sellers has been to drop prices.

These price reductions are not a pullback; they are a correction because they were hyperinflated, to begin with, and at an incorrect level. Now, they are just leveling off. I think we'll get to a place where it's a little bit more even keel and where there isn't much up and down movement. 

Home prices and the nature of interest rates would be another interesting topic to discuss. This is just one of our many videos with Ryan. We’ll talk about a few different topics in the upcoming weeks. If you have any questions about this topic or anything about real estate, call or email me. I’m always happy to help!