Mortgage rates and home prices

Mortgage rates have dropped for some homebuyers but home affordability is near a six year high.  How does that work when interest rates are so low?  Home prices have been rising so the combination of interest rates, home prices and a small down payment means that less than two thirds of US homes were considered affordable in the last quarter.

Some of the recent data shows that home prices are up an average of four percent nationwide.  Mortgage interest rates may have bottomed out.  So as interest rates start to rise and home prices continue to rise, more homebuyers will have problems finding homes that they consider affordable. So does that mean that now is really the time to buy a new home?  That answer will depend on where interest rates go in 2015, how much housing prices continue to change and the availability of low down payment mortgages.

Home affordability is based on the average home sales price for the area, the thirty year mortgage rate for the time period and figures out the monthly payment for the average home price.  Then they use the average income for the area and calculate an "affordable" home price.  The home price should be about 28% of the average income.  When we qualify you for a mortgage, ideally the mortgage payment including taxes and insurance should be about 28-33% of your gross income. The is what we call the front end debt to income ratio.  The back ratio should be under 45%, especially for conventional loans.

Home affordability has decreased over the last few years as the economy has recovered.  The National Association of Home Builders released affordabilty numbers and in the last quarter of 2014, home affordability was at 62.8%.  This means that 62.8% of US homes were affordable for those earning the national median income of $62,900.  In 2012 that rate was at 74.9%. 

Going forward, home prices are expected to continue to rise, income is expected to be flat.  The question that we don't know the answer to is what are mortgage interest rates going to do.  Since the start of 2014, mortgage rates have fallen an average of about .75%.  They have been moving around a little bit, slighlty up in the last month. But as 2015 continues, we'll see if the interest rates continue where they are or go up.  If they start to go up, that means now is definitely the time to buy a new home!

Leslie Vanderwerf,  NMLS ID#335509, American Mortgage & Equity Consultants, NMLS#150953 – EmailWebsite

 

Written By

Currently a Senior Loan Officer at Cross Country Mortgage LLC, it's hard to believe I have been in the mortgage business for more than 25 years and have worked with Sharlene since 2000! I love sharing mortgage insights here each week and helping people finance their homes. Listening helps me find the right program for you!

Related Posts

Are you saving for a down payment?

🖨 Print Article Are you getting a tax refund? That can help you add a little cash to your savings. According to a post from Keeping Current Matters, the average...

Weekly real estate market update 4/11/25 – why you don’t want to skip your home inspection

🖨 Print Article Real estate showing activity is holding steady as it is starting to feel like spring. New listings, pending sales and multiple offers are all increasing as coming...

Subscribe to Our Newsletter for Market Updates & Mid-Century Modern Listings

Our weekly HomesMSP Update includes current local market information and a curated list of mid-century modern properties for sale, plus posts from an inspector, a lender, a stager, info about neighborhoods, life in the Twin Cities… even recipes!

This field is hidden when viewing the form

Blog Categories

Archives

Sharon and John Hensrud

About Us

The HomesMSP Team is committed to meeting you where you are and listening… really listening to understand you so we can use our extensive knowledge of the market and local neighborhoods to give you personalized service.