This Day On The Street
Continue to site
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

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 - Get Report) (http://www.zillow.com), 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.

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
SYM TRADE IT LAST %CHG
Z $79.24 -1.20%
AAPL $122.63 -0.61%
FB $96.07 0.82%
GOOG $624.34 -0.58%
TSLA $263.80 -0.39%

Markets

Chart of I:DJI
DOW 17,726.04 +95.77 0.54%
S&P 500 2,103.00 +9.75 0.47%
NASDAQ 5,098.3210 +9.1150 0.18%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs