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Rising Mortgage Rates Affecting Home Values

Zillow • Aug 27, 2014 at 3:13 PM

By S.E. Slack Locations like the City by the Bay continue to produce home values higher than they have ever been and most areas of the country have seen home values appreciate at higher than historically normal rates. Don’t look for skyrocketing home value appreciation to continue. It’s just not sustainable in many markets, according to Zillow, because it is driven by inventory shortages and, more importantly, continued bargain-basement mortgage rates.

Recent low mortgage rates have given home buyers more home for their buck. This greater affordability has in turn also helped to increase home values. That’s helped to make up for stagnant or even decreased household incomes, which aren’t expected to grow much beyond the normal rate in the coming years.

But as the Federal Reserve begins to hold back on economic easing efforts, mortgage rates will continue to increase. In the summer of 2012, mortgage rates for a 30-year fixed rate dipped below four percent. Currently, however, those mortgage rates are closer to 4.5 percent. With every increase in the mortgage rate, buying power decreases and affordability levels move closer to their historical averages.

In turn, the price-to-income relationship will once again be too high for many home buyers as demand for homes is no longer fueled by low mortgage rates. Home values will have to either remain stagnant, while incomes catch up or will decrease.

“In the future, we expect that (the housing) market will experience stagnant or depreciating home values and a price-to-income ratio that is more in line with its historical average,” said Svenja Gudell, senior economist for Zillow.

At its lowest and most affordable point – the first quarter of 2013 – the mortgage payment for a house in the United States was about 13 percent of the monthly median household income. In the second quarter of 2006 – at the height of the housing bubble – a monthly mortgage payment made up 24 percent of median household income.

Across all markets, mortgage rates of 5 percent or more knock out home buyers in 30 out of 250 metropolitan areas covered by Zillow. At 6 percent, 67 more metros will be less affordable than they had been and, at 7 percent, another 143 of those metros will be less affordable.

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