Interest Rates are Rising, But Home Prices Are Not Falling.

A Shift From 2022.

It has been over a year since the Federal Reserve commenced a series of aggressive increases in interest rates which were aimed at slowing down a white-hot economy. As I've discussed a number of times on the blog, the impact on the real estate market from this move was absolutely brutal. Home mortgage interest rates skyrocketed from the 3% range all the way up to nearly 7% in a matter of months.

Buyers stopped buying, and home prices plummeted throughout the second half of 2022.

But then an interesting thing happened as we entered 2023 – home buyers begrudgingly accepted the new reality of higher interest rates, and they started purchasing again. Although it was not nearly at the rate of a normal year in San Carlos, serious buyers were definitely back in the market again, and that had the effect of stabilizing home prices in San Carlos. As we look back at home prices over the past two years, it's clear that the fourth quarter of 2022 indeed marked the bottom of this unprecedented nose-dive in home prices.

Rates Keep Rising.

Despite predictions by economic experts that interest rates should start to slowly ease in the remaining months of 2023 and into 2024, the Federal Reserve does not appear to be reading the same playbook. They recently announced that while they decided to pause any rate hikes in the month of September, they expect to raise rates again one more time in 2023, and they foresee fewer rate cuts in 2024 than they originally predicted. In fact, there are some that are now predicting that we could see home mortgage rates top 8% before the end of this year. None of this is good news for home buyers.

If we look at 2022 as a predictor of market performance, then home prices should continue to drop as mortgage interest rates continue to increase, right?

The data may surprise you.

Home Mortgage Rates vs San Carlos Home Prices.

The graph below shows the steady increase in home mortgage interest rates since the beginning of 2023, as charted by Freddie Mac:

With the exception of a few minor dips downward, rates have effectively increased by nearly a full percentage point since beginning of 2023. From this data, one could logically draw a conclusion that the home price chart should be the exact opposite of this — basically showing a steady decline throughout 2023.

But that's not the case. Below are two charts that show the price performance of San Carlos single-family homes since the beginning of the year. The chart shows the average sales price during the period:

And the second is the average price per square foot — a metric that helps normalize the variance in the size of homes that sold:

While the price per square foot has remained essentially flat so far in 2023, the average sales price has actually increased by almost 21% since January. One wouldn't expect this kind of performance in a year where interest rates that have increased by about 12% over the same period.

This isn't to suggest that all homes are increasing in price. There have certainly been quite a few price reductions in listing so far this year, but we're also seeing multiple-offers with much more frequency than we were last year at this time.

“Wait-and-See” is Not a Good Strategy.

If this trend continues to hold — or even if prices just remain flat — it spells trouble for those home buyers who are playing the wait-and-see game mistakenly believing that yet another rate increase will drive prices downward, because the data simply doesn't support that line of reasoning.

The reality of waiting to buy is that the cost of money is just going to increase for the same asset. And an even worse strategy is to wait until interest rates start to drop, because that will bring more buyers back into the market, which means more competition, which then ultimately means that prices will just continue to go up.

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