Mortgage rates continuously shot up over the past several weeks. And, the recent increase in mortgage rates is raising some concerns for its impact on home affordability, but a report from Goldman Sachs (GS) downplays those worries.
Housing affordability is currently far above past average levels, showing that housing can remain affordable by historical standards.
According to data from the National Association of Realtors, the housing affordability index assumes the typical homebuyer makes $50,000 a year, pays a 20% down payment and obtains a 30-year fixed-rate loan.
Additionally, the company explains that a easy-to-handle house price is defined as a 25% debt-to-income ratio.
In result, Goldman Sachs said, “For a mortgage interest rate of 3.81%, the average homebuyer can afford to buy a house worth $279,000 — 45% above the current median sales price of existing homes.”
It expanded saying, “Put differently, even if mortgage rates continue to increase from here, the median home will still be affordable to the median borrower, based on the conventional 25% debt-to-income threshold.”
The company found that after combining real Gross Domestic Product growth, inflation and interest rates, house prices will grow about 4-5% per year in 2014-2016.
“As a result, rising interest rates will likely slow the strong house price appreciation observed over the past year, but the impact will likely be modest given the cushion provided by the high level of housing affordability at present,” the company explained.