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Higher Mortgage Rates are Making Properties Unaffordable
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It’s a common belief in real estate that house prices are correlated to interest rates. New home sales account for around 7 percent of the residential market and are cataloged when contracts are signed, making them a timelier barometer than transactions on existing homes. Chief economist for Trulia Inc., a San Francisco-based real estate information service, Jed Kolko, said that according to Bloomberg News, “Prices are rising, mortgage rates are higher, and that makes it considerably more expensive to buy than it was a year ago.” Kolko reports that, “Affordability is definitely a concern.” Properties are more expensive and borrowing costs have jumped almost a percentage point from last year.

According to vice president for applied economic and housing research for Fannie Mae, Mark Palim, there is not a strong relationship between house prices and interest rates. “Rates tend to rise because, in a relative sense, the economy is doing well, incomes are going up, people can afford more and they’re willing to take out a larger mortgage. Intuitively, you’d think that if interest rates go up, of course, house prices go down. But they don’t,” Mark Palim says, according to Bank Rate.


Chief economist for the National Association of Home Builders in Washington, David Crowe, shared that “The first-time home buyer is not participating, nor are other buyers of modest means.” He says that, “We’ve lost a segment of our homebuyers because of tight credit.” “You don’t get a job one day and buy a home the next,” said economist Jed Kolko. A senior economist at Moody’s Analytics Inc. in West Chester, Pennsylvania, who forecast sales would drop in March, Ryan Sweet, said that “It’s the reduction in affordability, the lack of inventory, also weak growth in median household income — all these are contributing to the sluggish recovery in housing.” According to Bloomberg News, Ryan Sweet reported that it’s going to raise concerns about the strength of the housing recovery, but it’s too early to be too worried.”

“The bottom line is that other factors, like a stronger economy have a bigger impact on house prices than changes in mortgage rates,” blogger Bill McBride wrote in a post on his financial blog, Trulia’s Jed Kolko shares, “It takes years to save for a down payment, build up an income history to qualify for a mortgage. Buying a home and getting a mortgage is making a bet that you’ll be able to keep paying for that mortgage. And you need to feel secure in your job and your income to make that decision.”

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