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I am a bit confused with co-relation between rate hike being a good or a bad thing for home buyer. I have some notions and please correct me on each if I am wrong:

  1. Home Prices and Interest rates are in inverse proportion to each other
  2. I have friends who rushed to buy houses this year because according to them it is the best time to buy a house because rates are so low(they completely disregarded the fact that home prices are so high). I dont think it is smartest of the moves. Am I right or wrong thinking that?
  3. Extending on #2, if prices and rates are inversely proportionate then I think anyone would end up paying the same mortgage regardless of when he/she buys a property because your mortgage is affected by both.
  4. In short, is rate hike a good news or bad news for a home buyer?
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    Isn't the general rule that interest rate increases are bad for borrowers and good for savers. – sgmoore Dec 14 '16 at 21:20
  • Keep in mind that interest rates only effect non-cash buyers directly. About 1/3 of properties in the US do not have a mortgage. – Pete B. Dec 14 '16 at 21:24
  • Added united-states as it seems that is what you're asking about; if that's incorrect, please remove it (and clarify further). – Joe Dec 14 '16 at 22:14
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Let me address each of your points:

  1. Home Prices and Interest rates are in inverse proportion to each other

This is not necessarily true at all. Home prices are driven by supply and demand, not by interest rate. It might be true that when rates go up, the demand for houses goes down, as fewer people can afford a house. But in any individual location, other factors will affect prices a lot more than just interest rate changes.

  1. I have friends who rushed to buy houses this year because according to them it is the best time to buy a house because rates are so low(they completely disregarded the fact that home prices are so high). I dont think it is smartest of the moves. Am I right or wrong thinking that?

I don't think rushing to buy a house is ever a good idea. You should buy a house when you are ready to buy a house, and speculating on whether the housing prices or rates will go up or down is not productive.

  1. Extending on #2, if prices and rates are inversely proportionate then I think anyone would end up paying the same mortgage regardless of when he/she buys a property because your mortgage is affected by both.

As I said in #1, it simply isn't true that interest rates and housing prices are exactly proportional. But I will agree with you that it is short-sighted to rush to buy a house before you are ready because you think that the rates are going up, and not even consider other factors, such as housing prices. On the other hand, if you are already in a situation where you are ready to buy a house, it doesn't make sense to wait, either, especially if you think that the rates will go up.

  1. In short, is rate hike a good news or bad news for a home buyer?

This is just my personal opinion, but if I am buying a home, I want the interest rate to be as low as possible. I would certainly not be happy if the rate went up just before I was ready to buy. However, as borrowing rates go up, interest rates paid on savings accounts will also go up, which is good news for the saver and investor (I am both). As a result, I'm not too concerned about interest rates either way.

2

The last rate hike we had (in December 2015) did not cause mortgage rates to change much at all. See this chart from ycharts of 30-year mortgage rates, for example; average 30-year mortgage rates fell in 2016. So there's no guarantee that rates will rise significantly as a result of this hike.

However, other things are pressuring interest rates up. Speculation about the rate increase itself, for example, may be one major factor; rates in October were 3.42% but now over 4%, meaning they've gone up well over half a point in two months already. It's very possible the rate increase is already mostly priced in. See this Freddie Mac chart for example:

https://i.stack.imgur.com/eT9vf.jpg

So it's very much possible that you won't see any increase at all in mortgage rates at this point, similar to how there was nearly no increase after the December '15 rate hike.

As far as prices dropping because of the mortage rates, well, Ben covered that well in his answer: they probably won't, or at least mortgage rates are not the primary factor in housing price changes. Sure, if rates doubled or tripled, we'd see demand fall and probably some price drops, but rates aren't going to change that drastically any time soon.

  • These are 30y rates. If you're on floating rate or short term fix you will feel this. – SMeznaric Dec 15 '16 at 9:37
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    30yr fixed are the most common US mortgage type by far. – Joe Dec 15 '16 at 14:38
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Generally you are correct in most thinking, and this relates more for variable interest rates rather than fixed interest rates. Where I am from, Australia, most mortgage loans are variable, and the fixed rates are only from 1 to 5 years in general.

The actual best time to buy property is when interest rate are at their highs and talk is that the next rate move will be down. When everyone is telling you not to buy property now, that is when to buy property. When no one shows up to auctions, that is the time to buy property.

Local factors can affect the price of property but when interest rates are low, and especially at record lows, it will drive up demand for properties and drive up the price, just like your freinds rushing to buy houses this year.

I bought in 2008 when interest rates were around 9%. Within six months of buying interest rates fell more than 3% and and rents started going up as the supply of rental properties dried up. I would be the only person bidding at auctions so basically had no competition. The risk was all on the downside.

If you buy when interest rates are at or near record lows you will be buying when risk is on the upside, you will likely have interest rates starting to move up and property prices starting to level off or fall. Rents will also start to stagnate whilst there are an oversupply of rental properties in the market. All of this equates to a perfect storm of risks going up on all sides.

So overall your thinking is correct.

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