Economist: Higher mortgage rates to lower home prices

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(The Center Square) - Arizona housing prices will continue to decline with the recent increase in mortgage rates, according to an economist.

In September, the Federal Reserve raised its benchmark interest rate target from 3.75% to 4%, pushing mortgage rates above 7% for the first time since January 2025. Before the interest rate increase, mortgage rates were around 6.5%.

Zach Milne, the Commons Sense Institute director of policy and research, said the higher mortgage rates will cause Arizona’s housing market to continue to slow and “put downward pressure on prices overall.”

Milne told The Center Square he thinks it will lead to “price softening” in Arizona, as the state has seen over the last two years. The average Arizona home price in August 2024 was $436,555, according to the Zillow real estate website. Two years later, the average Arizona home price is $418,000.

He noted he did not anticipate a significant drop in home prices.  

Lisa Paffrath, 2026 president of the Arizona Realtors, said people worry when mortgage rates rise because their monthly payments go up.

Milne estimated if a person puts 20% down on a $418,000 home at a 7.3% mortgage rate compared to a 6% mortgage rate in February, they would pay almost an extra $300 in monthly mortgage payments.

This represents more than a 13% increase in monthly mortgage payments over an eight-month span. Milne called this a “significant jump.”

He noted the calculation did not include monthly fees for insurance, utilities and other items associated with homeownership.

According to Paffrath, the latest mortgage rate increase will hurt more than any other mortgage rate increase over the last three years.

Arizonans have less buying power than before interest rates went up, she told The Center Square.

For example, Paffrath, who is a real estate agent in Flagstaff, said an Arizonan who prequalified for a $400,000 loan before the rate increase would now qualify for only a $380,000 loan because of the rate change.

She said the increased mortgage rates will have a large effect on first-time homebuyers.

Unless a first-time homebuyer is inheriting money or diligent at saving, Paffrath said it is “really hard” for them to afford a home.

Milne added that first-time homebuyers are taking longer to save enough for a down payment.

He said people with a lower monthly mortgage payment may wait to put their homes on the market and look elsewhere to live, which will affect first-time homebuyers.

Paffrath noted she works with many first-time homebuyers who want to purchase a home but can't afford anything because of prices. 

“It’s sad,” she said.

According to the National Association of Realtors, the median age of a first-time homebuyer is 40, an all-time high.

Paffrath said the days of 3% mortgage rates are never coming back unless “something catastrophic” happens. She noted she didn’t expect rates to go down soon, and if they did, the decrease would be between 0.125% and 0.25%.

Paffrath said it will take Arizonans some time to get used to the rates above 7%. Current interest rates are historically low compared to the 1980s, when double-digit mortgage rates were common, the real estate agent explained.

With the elevated interest rates, Milne said he thinks Arizonans will pull out of the homeownership market and head toward the rental market, which will increase rental prices.