How 1% and $1,000 Could Crush the Housing Recovery

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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 come.

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 Priced Out 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 " negative effect " 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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