Fed-Induced Panic Could Lead to Surge in Home Sales Before the Next Crash

Friday, 28 Jun 2013 07:41 AM

By Michael Carr

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Higher interest rates could lead to a short-term increase in home sales, as potential buyers realize they need to act quickly to lock in low mortgage rates.

In the past two months, the average mortgage rate has reached 4.46 percent, up from 3.5 percent at the beginning of May. This difference increases the monthly payment by almost $100 a month for buyers of an average priced home with a 20 percent down payment.

But many buyers are putting down less than 20 percent. The difference in payments is about $110 for buyers with a 10 percent down payment.

Higher mortgage payments make homes less affordable. A family with an income of about $55,000, the national median income, has lost more than 10 percent of their buying power with the increase in rates.

As the average family becomes priced out of the market, home prices should drop. Before that happens, we are likely to see home sales accelerate, which should put upward pressure on prices for a short period of time.

In the long run, home prices should move toward equilibrium, where the average family can afford the average home. With interest rates moving higher in the years to come, home prices will need to come down in the long run.

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