• Historically, the psychological effect of rising rates seems to cut two ways.
  • One way is prompting buyers to move quickly before rates rise even more.
  • Alternatively, higher rates entice cautious buyers, who are already cutting it close with their personal finances, to hold off buying a house.

Nobu Hata is actively in the market to buy a home, and he knows interest rates are going up, but it is still “a little bit of gut check when it happens.” The Chicago resident dubs it a “personal hurdle” for some homebuyers. (Although Hata works for the National Association of Realtors, this is not the official company line.)

The Federal Reserve announced its first rate hike (0.25 percent) in almost nine years. The effect on the economy, the stock market and housing sales have been debated and analyzed by policy makers and the news media for almost a year.

For the housing market, most industry experts downplay the effect of interest rates, but historically, the psychological effect of rising rates seems to cut two ways:

  • Prompting buyers to move quickly before rates rise even more
  • Alternatively, higher rates entice cautious buyers, who are already cutting it close with their personal finances, to hold off buying a house.

“Even something as small as one-eighth increase in interest rates can alter the affordability for countless consumers,” said Jeff Chalmers, a vice president of Ross Mortgage Company in Franklin, Massachusetts.

Beyond the economics, the psychology cannot be underestimated with the “rate increase becoming more powerful than the rate increase itself,” said Keller Williams broker Jay Lieberman from Thousand Oaks, California.

The context of a rate hike is often ignored when analyzing the effects. Rates generally go up when the economy is growing, which is the most important factor shaping home sales and prices — not the bump from rate increases. A good economy generally means a healthy housing market.

Plus, even many experts do not understand the effect of a short-term rate hike by the Federal Reserve on mortgage rates.

“The appetite for investors to buy mortgage-backed securities and US Treasury notes, particularly the 10-year note, are what actually drive mortgage rates up or down,” said Danny Dietl, a broker at BRIX Real Estate in Minneapolis, Minnesota. The long term market is healthy, so mortgage rates could actually go in the opposite direction of short-term rates.

In other ways, the relationship between housing prices and interest rate increases is often misunderstand, or even counter-intuitive.

Chris Heller, President, Keller Williams Courtesy: Keller Williams

Chris Heller, CEO, Keller Williams

Keller Williams CEO Chris Heller in Austin, Texas, said that historically, “a 1 percent increase in mortgage rates equates to a 10 percent increase in home prices.”

The alternative to buying a house is renting, and rents have never been higher.

“The rental market is extremely overpriced right now and isn’t expected to correct for at least two more years,” said Samantha DeBianchi, founder and CEO of DeBianchi Real Estate, Miami.

Plus, the important factors shaping demand for housing may have less to do with interest rates and more to do with the complexities of the buying and selling process and qualifying for a mortgage.

MLS executive John L. Heithaus in Nashville, Tennessee, is considering buying an investment property, and his “biggest hassle is the damn paperwork and backup stuff more than interest rates.”

St. Paul’s Boardman Realty broker Teresa Boardman said we should we all get over the Fed hoopla.

“Interest rates were over 6 percent in 2005, and yet we sold more houses that year than we will sell in 2015. However, when you start with the whole ‘psychological’ thing, we get all ‘OH NO! We are all going to die!'”

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