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The real estate market has been a bit of a non-starter this
year, as rising prices, low inventory, and tougher mortgage rules
hobble home-buying activity. As if that news isn't bad enough,
recent research and analysis indicates that the worst is yet to
Both the National Association of Home Builders and real estate
marketing site Zillow have weighed in on separate factors that
greatly affect housing affordability: escalating home prices, and
rising interest rates. In each case, according to the analyses
presented, prospective home buyers will have to adjust their
expectations - or, in some cases, may even find themselves priced
out of the market altogether.
Homebuyers will be "Priced Out"
The NAHB has recently updated its
model, and the results are dire, indeed. The Association
estimates that a rise of just $1,000 in the price of a new home
will cause 206,269 prospective buyers to be priced out of the
housing market. The update examines 324 different U.S. housing
markets, identified by metropolitan statistical area.
That's a pretty precise number, and it should be noted that
this piece of research is taking aim at new home-building
regulations that the industry says will add to home builders'
costs - and, by extension, to the buyers of those homes.
Still, the analysis has validity, since the report uses 2012
federal census data to compute current income levels - and a rise
of $1,000 in median housing prices is certain to have an effect
upon sales, no matter what the source of the increase.
The report assumes that no more than 28% of income will be
used toward total housing debt, as well as a 30-year mortgage
with a 10% down payment and fixed interest rate of 4.5%. Though
the analysis is discussing the cost of new construction, a
similar increase in prices of existing homes for sale would
doubtless have the same effect.
Interest rates matter, too
Zillow takes a look at interest rates, framed by the question of
whether home buyers would be better off purchasing a home in 2014
- or waiting until next year. Zillow encourages prospective home
owners to jump in now, due to the expectation that long-term
interest rates are expected to rise in the future.
Though facilitating real estate sales is Zillow's bread and
butter, its economists have a point about rising rates, which
most analysts expect to commence with the end of the Federal
Reserve's quantitative easing money policy this fall. Of the more
than 100 housing experts polled by Zillow and Pulsenomics for the
quarterly Home Price Expectations report, 62% said that they
believed that rising interest rates would have a "
" upon home sales.
Using projected real estate values for 2015 and an interest
rate increase of 1%, Zillow analysts estimated that monthly
mortgage payments would increase between
$710 in San Jose, California
, to $65 in St. Louis, Missouri. While the median home values
used also include a measure of home price appreciation, Zillow
asserts that, on average, a 1% hike in long-term interest rates
translates into a 10% decrease in home affordability.
Does a jump in mortgage interest rates from 4.1% to 5.1%
simply mean that buyers will need to lower their sights from a
house that costs $300,000 to a slightly less pricey $270,000
home? Possibly - though many may be priced out of the market
entirely, particularly if house inventories in the new price
range are too low, or rejiggered numbers cause borrowers to run
afoul of the new
43% or less debt-to-income ratio
necessary to obtain a qualified mortgage.
Although home price appreciation is slowing slightly, and a
sizable increase in long-term rates is in no way guaranteed,
these studies bring up an important point - that the housing
recovery is still so fragile that any bump in the road could very
well cause it to derail. That bit of knowledge is, in my opinion,
the worst news of all.
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How 1% and $1,000 Could Crush the Housing
originally appeared on Fool.com.
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