Do mortgage rates and sales volume really drive home prices?

Conventional wisdom is occasionally right, but I like to query it.

Let’s look at two widely quoted “facts” in real estate: that higher sales are a sign of a healthy market; and that mortgage rates drive prices.

First, I plotted the annual median price of SFHs in Essex County vs the annual level of sales. I think one can say that both sales and prices declined from 2005-2008, but from 2000-2003 prices went up sharply while sales were largely flat, and from 2011-2013 sales jumped but prices were up only modestly. Verdict: some correlation, but no consistent link between sales and prices.

Source: MLS, Oliver Reports

Source: MLS, Oliver Reports

Next I turned to mortgage rates. I keep reading that the reason that sales are down a bit this year is because higher mortgage rates – coupled with higher prices – have made home buying less affordable.

Let’s look at history. I have plotted median prices of SFHs in Essex County against the 30 year mortgage rate.

What we see here is that falling mortgage rates have indeed coincided with periods of rising home prices, as in 2000-2004, but they also fell along with home prices from 2006-2009. And you will note that the absolute level of mortgage rates during the boom years of 2000-2005 ranged from 6-8%, compared with just over 4% today. Verdict: some correlation when mortgage rates dropped from very high levels, but no consistent link since.

Source: MLS, Freddie Mac, Oliver Reports

Source: MLS, Freddie Mac, Oliver Reports

The decision to buy a home or scale up to a new home is complex. It is driven by a desire to have the security of owning one’s own home, and is influenced by a number of factors: confidence in one’s job and future prospects; confidence in the economy; confidence in the future of home prices.

I asked a respected and well-informed real estate professional yesterday where he thought mortgage rates were today compared with a year ago. He guessed 1/2% higher. The answer? Well according to Freddie Mac, the 30 year mortgage rate this week is 4.14%. A year ago it was 4.46%.

Next week I shall publish my mid-year reviews and these will show that in the first half of 2014 sales were down slightly, the mortgage rate was up, and prices were…….check back next Saturday to find out!

If you  – or somebody you know – are considering buying or selling a home and have questions about the market and/or current home prices, feel free to contact me on 617.834.8205 or

Andrew Oliver is a Realtor with Harborside Sotheby’s International Realty

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