Understanding the Correlation Between Mortgage Rates and Home Sale Numbers

Common sense will tell you that the sales of homes increase when mortgage interest rates decline and the sales of homes decreases when mortgage interest rates increase. The logic hinges on the belief that interest rates determine affordability. If rates increase, affordability decreases thus the sales of homes should decrease. The sales of homes in the current housing market shows there is no correlation between rates and home sale numbers. The problem with common sense is that it is sometimes wrong.

The number one factor that drives home sales is affordability not mortgage rates. Mortgage rates may influence whether or not a person buys a house but it is not the limiting factor like affordability is. People will buy a house if they are able to afford the price.

What is affordability? Affordability is made up of many factors. The interest rate on mortgages is one factor. Most lenders require a mortgage payment to be a debt to income ratio of 32 percent or less. Lower interest rates will allow a person to qualify but have their loan application rejected at a higher interest rate. If interest rates start to increase, the number of homes sold has a jump in sales because people rush to purchase before the rates increase to a point they can no longer afford to purchase the house.

Another factor is the amount of down payment that is required to purchase a house. If a person can purchase a house with only a 3 percent down payment they may be able to purchase a house. If you push the down payment to 20 percent, that person may no longer have sufficient funds to purchase the house. The amount spent on closing costs can also be a deal breaker in purchasing a house.

The price of homes is another determining factor for the sale of homes. Lower priced homes have a larger pool of qualified buyers so the sales of these homes are quite brisk. Yet sales of more expensive homes are not as brisk.

With the current downturn in the housing market, sales of homes have decline for the past year. This has occurred even though the interest rate on mortgages has been at an almost 50 year low. If there was a strong correlation between mortgage rates and home sale numbers, then the sales of homes would be increasing due to the historically low mortgage rates. This shows there is no correlation between mortgage rates and home sales.