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April 15th, 2011

Maybe home prices aren’t the statistic that matters most…

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House on Calc for tri refiIf you follow what I write about on this blog even somewhat closely, you’ll know that I often refer to home prices as “the statistic that matters most.” I’ve written several times that home prices are an important economic indicator — a tell-tale sign of how the overall economy is progressing. I’ve said, until home prices get back on track, this country’s economy will continue to suffer.

Dan Green, a loan officer in Cincinnati and regular contributor to HSH.com, offered a different spin on the importance I’ve placed on home prices. It’s not that Green necessarily disagrees with me, but according to him, there’s something homebuyers should worry about more when they’re shopping for homes and determining their levels of affordability: mortgage rates.

The title of Green’s most-recent contribution to HSH.com is pretty much self explanatory: “Mortgage rates matter more than home prices.”

Sure, if you’re buying a home entirely in cash, home prices, not mortgage rates, are your top concern. But for most potential homebuyers out there, especially first-time buyers, financing that home purchase could last 30 years (maybe even longer).

So, for the average homebuyer, affordability is made up of two components, explains Green, home prices and mortgage rates. But which one has the greatest influence on costs? Again, Green points to mortgage rates. Here’s why:

Homeownership costs way up since November

As compared to those all-time lows from November, current mortgage rates are some 70 basis points (0.70 percent) higher. That’s a rapid rise for such a short period of time, and its effect on household budgets is palpable.

For example, let’s say you’re buying a home with a $375,000 purchase price and making a 20 percent down payment. That’s a $300,000, 30-year fixed rate mortgage.

  • In November 2010, at then-current mortgage rates, the cost to pay the loan to term would be $532,431.
  • In April 2011, at current mortgage rates, the cost to pay the loan to term would be $584,510.

That’s a $52,079 increase in interest costs in just six months. As mortgage rates keep rising, those costs will go higher.

Rising mortgage rates outweigh falling home prices

To be fair, the example above assumes that home values have idled for the last six months, and they haven’t.

According to the U.S. government, home values nationwide are down somewhere between 1 percent and 2 percent since November, with some markets outperforming others.

None underperform so poorly that the effect of rising interest rates is negated, however. For that to happen, the $375,000 home from six months ago would have to sell for $345,000 today–a drop of 8 percent. Home values aren’t falling anywhere close to that fast.

Even in Phoenix–the Case-Shiller Index’s worst-performing market–home values are down just 4.6 percent semi-annually.

If you’re planning to stay in your home for “the long haul,” which will save you more over the course of ownership, cheap home prices or low mortgage rates? Dan Green certainly makes his opinions known in his latest article “Mortgage rates matter more than home prices.” Now we want to hear your thoughts – be sure to leave us a comment below.

Have a great weekend everyone.

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About the HSH Blog

HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni

Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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