Rising Interest Rates Preventing Housing Bubble Trouble

Despite concerns of a sharp rise in mortgage interest rates driven by Federal Reserve comments that it would scale-back its stimulus activity, the thought of another housing bubble is still premature, according to a recent CoreLogic MarketPulse report.

The recent rise in mortgage rates is actually helping to slow the pace of current appreciation preventing another bubble, and rates would have to rise considerably higher to cause a housing market downturn, writes CoreLogic’s Chief Economist Mark Fleming and Senior Business Systems Analyst Gilberto Méndez. 

While housing bubbles—or bubbles of any kind for that matter—are difficult to predict and are not identified until after they have occurred, CoreLogic measured home prices to see if they are based on fundamental conditions. 

A commonly used measurement in this regard is affordability, as it accounts for both income and interest rates—which borrowers use to pay a mortgage as well as the price paid to borrow money to fund a mortgage.

Using an index that based on the ratio of median household income to the cost of qualifying for a mortgage on a median-priced home, a CoreLogic index value of 100 indicates that a household with median income has just enough income to buy a home. 

An index reading greater than 100 indicates the median-income household has more than enough income to afford the median-priced home. Conversely, a reading below 100 signifies that the household has less income than necessary to purchase.

“Nationally, housing affordability couldn’t be better,” write Fleming and Méndez. “Home prices were consistently affordable in the early part of the ‘aughts’ as incomes rose and mortgage rates fell.”

The affordability index reached a low point in June 2006, notes CoreLogic, when prices reached their apex and the national median-priced home was unaffordable for the national median-income family.

Since then, falling home prices and declining interest rates signaled greater affordability for housing. 

“Because mortgage rates are, by historic standards, still low, housing remains highly affordable, even with the recent impressive increase in prices,” write Fleming and Méndez.

Looking at the high, low and current levels of housing affordability for the 25 least affordable states in the country, only Washington, D.C. and Hawaii are technically unaffordable, according to CoreLogic. 

While the nature of home buyers’ expectations are unclear, CoreLogic believes there is still a long way to go before housing again becomes unaffordable, even with the most recent price gains and interest rate hikes.

Written by Jason Oliva

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