NEW YORK ( TheStreet) - Rising interest rates could slow the pace of home price appreciation unless incomes rise, Citigroup housing analyst Will Randow said in a report Friday.
This could actually be a good thing, according to the analyst.
"We believe that slower home price appreciation likely is healthy, compared to the recent 13% YoY jump in the S&P/Case-Shiller Home Price Index, as fast moving home prices could ultimately create another housing bubble (i.e. overvaluation) if interest rates did not respond as a governor," he said.
Interest rates have moved rapidly over the past month after Federal Reserve Chairman Ben Bernanke said the central bank may begin to wind down its massive bond- purchase program later this year, though it will keep short-term interest rates low until 2015.Over the past month, the 30-year mortgage rate has risen from 3.35% on May 2, to 4.46% as of June 27. The speed of the move has caught market participants by surprise and raised concerns about the sustainability of the nascent housing recovery, which has been fueled by rock-bottom interest rates. Randow notes that despite the rise in interest rates, from a historical perspective, housing affordability is "still in good shape." He estimates mortgage rates need to rise to 6% to 7% before the family home price-to-income ratio is in parity with the 15-year average. However, he does expect rising interest rates to dampen affordability levels. A 1 percentage point increase in mortgage rates would require $1,500 more in annual median family income to not impact housing affordability, assuming a 20% downpayment, according to the analyst. Or incomes need to grow 2% for every 1 percentage point rise in mortgage rates. In the absence of a rise in incomes, affordability will likely take a hit, slowing the pace of home price appreciation. Randow already sees signs home price gains will moderate in the next few months. Existing home inventory is already up 15% year to date and with rising prices, more upside-down homeowners are returning to positive equity and will be in a position to sell. So inventory will likely pick up in the coming months, cooling home prices. -- Written by Shanthi Bharatwaj in New York. >Contact by Email. Follow @shavenk
Select the service that is right for you!COMPARE ALL SERVICES
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV