With mortgage rates well below 4 percent for roughly the last two years, consumers have had incredible purchasing power. That’s going to change soon, according to Zillow. Prospective homeowners may want to get into the housing game quickly or risk being shut out completely.
Home values have been steadily increasing and, year-over-year, are up 5.8 percent nationally. Ohio is in line with that surge with an uptick of 5.4 percent, but many regions on the West Coast and in the South have seen even greater increases. For example, home values in San Francisco are up 25.5 percent, making housing there the highest it has ever been.
That’s great news for homeowners but not so good for buyers. Low mortgage rates give home buyers more home for their dollar, said Svenja Gudell, senior economist for Zillow. The Federal Reserve, however, is beginning to hold back on assisting the economy through lowered prime rates. As that happens, rising mortgage rates will combine with a housing inventory shortage to increase home values above affordability ranges.
“With increasing mortgage rates, buying power decreases and affordability levels will move closer to their historical averages,” said Gudell.
In turn, she said, the price-to-income relationship will once again be too high as home values are no longer sustained by demand fueled by low mortgage rates. Home values will have to either remain stagnant while incomes catch up or – a more likely scenario – home values will decline.
“This will especially be the case in those markets that have seen strong home value appreciation,” she said.
Zillow’s research shows that across all markets, mortgage rates of 5 percent or more bump out home buyers in 30 out of 250 metropolitan areas. At 6 percent, 67 additional areas will be less affordable than they had been. When interest rates rise to 7 percent, another 143 of Zillow’s measured metros will be less affordable, making more than 90 percent of all home markets unaffordable for buyers.