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Interest Rates and Homeowners

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Posted On: 10/30/2013

Question:

With interest rates rising, are homes becoming less affordable?

Answer:

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In an absolute sense, yes: Higher rates mean higher loan costs, so some would-be buyers will be forced out of the market. However, in a real sense, the mortgage rates we see today are likely to have only the smallest impact on practical affordability or home sales. Here's why:

When we look at “affordability,” we usually think in terms of numbers. The interest rate numbers look like this: Mortgage rates today are close to 4.5 percent, about 1 percent higher than a year ago. This means the cost for principal and interest with a new $150,000 fixed-rate loan is now $760, while last year it was $674.

So, yes, monthly costs are higher and this impacts the ability of some buyers to meet mortgage guidelines.

But interest rate changes, by themselves, are not the only factor to look at.

Home values have increased significantly during the past year. The government reports that second-quarter values in Las Vegas rose 26.6 percent, while they were up 12.8 percent in Miami and 22.7 percent in San Francisco.

Combine higher property values and interest costs, and the result will be bigger mortgages and monthly payments.

Rising home values raise questions for homebuyers: Considering how much values have gone up, should I buy today to catch further price increases? Is it possible that values in some areas have increased so much they will now slow or actually decline? Should I buy at this time to avoid possibly higher interest rates in the future? After all, while rates are up from 2012, they remain far-below historic norms.

The notion of affordability sometimes has to do with buyer perceptions and preferences. For instance, rental rates are up and vacancies are down in many markets, so while homes may be more expensive, so are rental costs.

Given tax write-offs for mortgage interest and property taxes, maybe ownership is simply the better option in a world where all costs are rising.

Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to peter@ctwfeatures.com.

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