Rising Interest Rates, Falling Lumber Prices: How it Could Impact Your Home’s Value
A closer look at the correlation between interest rates, lumber prices and its effects on the housing market
As a person who has always had a keen interest in real estate, I have been closely following the recent trends in the housing market. One development that has caught my attention is the correlation between increasing interest rates and lower lumber futures, and how it has the potential to significantly lower home values.
To understand this phenomenon, it’s important to first acknowledge the role that interest rates play in the housing market. When interest rates are low, it makes borrowing money to purchase a home more affordable, which in turn can lead to an increase in demand for homes.
On the other hand, when interest rates are high, it makes borrowing money more expensive, which can lead to a decrease in demand for homes.
Similarly, the price of lumber, a key material used in the construction of homes, can also have a significant impact on the housing market. When the price of lumber is low, it makes building homes more affordable, which can lead to an increase in new home construction and therefore an increase in the supply of homes.
The other side, when the price of lumber is high, it makes building homes more expensive, which can lead to a decrease in new home construction and therefore a decrease in the supply of homes.
Now, what happens when these two factors — interest rates and lumber prices — both trend in the opposite direction? The answer is simple yet profound: The cost of both buying and building a home goes up, which can lead to a decrease in both demand and supply of homes, ultimately resulting in a decrease in home values.
This is exactly what we have been seeing in recent times, with interest rates on the rise and lumber futures on the decline.
According to a report by the National Association of Home Builders, “the recent increase in mortgage rates has caused a drop in housing affordability, and the rising cost of lumber has added thousands of dollars to the price of a new single-family home.”
To illustrate the impact of this trend on home values, let’s take a look at a specific example.
Let’s say a person is looking to buy a new home that is currently priced at $300,000. With interest rates at 3%, the monthly mortgage payment for this home would be around $1,350. But, if interest rates were to increase to 4%, the monthly mortgage payment for the same home would jump to $1,450, an increase of nearly $100 per month.
Now, let’s add the cost of lumber into the equation. According to the National Association of Home Builders, the cost of lumber has gone up by more than 80% since April 2020. This means that the cost of building a new home has also gone up by a significant amount.
If we assume that the cost of building a new home has gone up by $30,000 due to the increase in lumber prices, the price of the $300,000 home that we were looking to buy would now be $330,000.
As a result of these two factors, the price of the home has gone up by $30,000 and the monthly mortgage payment has gone up by $100. This can make the home less affordable for many potential buyers, ultimately resulting in a decrease in demand for the home and a decrease in its value.
It is not only the buyer who will be affected but also the builder, as the building cost has gone up, the builder might not be able to sell the home at the same profit margin which in turn will lead to less new constructions and ultimately less supply of home.
As the famous American architect Frank Lloyd Wright once said, “The house is the hub of mankind. It is the point of origin, the place of return.”
When the cost of buying and building a home becomes too high, it can make the dream of owning a home out of reach for many people. The trend of increasing interest rates and lower lumber futures is a prime example of how seemingly unrelated factors can come together to have a significant impact on the housing market.
It is important to keep in mind that these trends are not set in stone and can change over time. However, as the housing market is a key indicator of the overall health of the economy, it is essential to pay close attention to these developments and their potential impact on home values.
As a potential home buyer or investor, it is essential to stay informed about these trends and make decisions accordingly. It is also important to remember that the housing market is not just about numbers and statistics, but also about the human aspect of having a place to call home.
As the famous American architect Frank Lloyd Wright once said, “The house is the hub of mankind. It is the point of origin, the place of return.”
It is essential that we continue to work towards making the dream of owning a home a reality for as many people as possible.
In conclusion, the correlation between increasing interest rates and lower lumber futures can have a significant impact on home values. It is important to stay informed about these trends and to consider their potential impact when making decisions about buying or investing in a home.
Ultimately, it is about striking a balance between the financial aspect of the housing market and the human aspect of having a place to call home.
