Mortgage-Rate-Adjusted Home Prices

TL;DR

This paper develops a mortgage-rate-adjusted measure of home prices to better understand market dynamics and aid individual decision-making, revealing mortgage rates' long-term influence but limited role during COVID-19 price surges.

Contribution

It introduces a novel 'effective price' metric and a price-mortgage rate neutrality line to analyze housing market responses to mortgage rate changes.

Findings

Mortgage rates significantly influence long-term home prices.

Effective prices help neutralize mortgage rate effects in market analysis.

Mortgage rates were not the main factor in COVID-19 home price increases.

Abstract

In this paper, we investigate the impact of mortgage rates on home prices, and how the impact may be used to help property purchase discussions at individual buyer level and to adjust home price indices across time. A mortgage-rate-adjusted "effective price" is derived to measure near term property price in the presence of (expected) mortgage rate changes. A price-mortgage rate neutrality line is then constructed based on the "effective price" to help differentiate various market scenarios in the near term, which can be used by prospective buyers in their "to-buy or not-to-buy" deliberations. At the market level, effective home prices allow for neutralization of mortgage rates on the movement of the housing market. An application of the neutralization strategy to the Case-Shiller Home Price Index (HPI) indicates that the U.S. housing market has been considerably affected by the dynamics of mortgage rates in a long run. But mortgage rates do no appear a primary driver of the extraordinary home price increase during the COVID-19 pandemic.