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Rising Interest Rates Will End Current Home Affordability

NEW YORK ( TheStreet) -- Home prices are rising, but Americans are paying less.

How's that possible? Because low interest rates have dramatically reduced the size of the typical mortgage payment, according to an by Zillow (Z) (, the housing data and listings firm.

"Thanks to historically low interest rates, American homeowners paid almost 37% less per month in mortgage payments in the fourth quarter [of 2012] compared to pre-housing-bubble norms -- even as homes themselves cost 14.5% more in the fourth quarter compared to historic averages relative to U.S. median incomes," Zillow said.

In the pre-bubble period of 1985-99, the 30-year fixed-rate mortgage charged between 6% and 13%, compared with just over 3% today. During the pre-bubble years, Americans spent 19.9% of the median household income on mortgage payments for the typical median-priced home. In the fourth quarter of 2012 they spent 12.6%.

At the same time, home prices have gone up relative to income. In the pre-bubble years, buyers spent 2.6 times their median annual income on a home. At the end of 2012 the figure was three times income, due to rising prices and stagnant income. Buyers can spend more when low interest rates allow them to qualify for larger loans.

The national figures mask wide variations around the country. In San Jose, for example, it takes 29.5% of monthly income to make the typical home payment, with the median home price at a whopping seven times median income.

At the other extreme, monthly payments cost just 6.5% of median income in Detroit, where the median home costs just 1.5 times annual income.

What's it all add up to?

Well, this is a pretty good time to buy. Rates remain extraordinarily low, and prices are still well below their bubble-era peaks despite gains over the past year or so. People who have stayed on the sidelines should think about getting that next home while the getting is good.

"The days of historically high levels of housing affordability are numbered," Zillow Chief Economist Stan Humphries says. "Current affordability is almost entirely dependent on low interest rates, and there's no doubt that rates will begin to rise in the next few years."

Higher rates will cause larger payments on loans of a given size, making it harder for buyers to qualify.

"Home values will have to either remain stagnant while incomes catch up or, quite possibly, home values will have to fall in some markets," Humphries said. "This will especially be the case in some markets that have seen strong home value appreciation."

No one expects another nationwide collapse in home prices like we experienced in the middle of the past decade. But it's not uncommon for prices to dip in individual markets. Though today's rates allow borrowers to qualify for large loans, buying the most expensive home you can afford would deepen your losses if prices were to decline.

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