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November 30th, 2011

Home sales improving, but what if mortgage rates weren’t this low?

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Fran Images--SoldTwo recent reports from the National Association of Realtors indicate that home sales (existing and pending) are on the rise. But what if current mortgage rates weren’t as low as they are—how would home affordability, which directly influences home sales, be affected? Would we see fewer home sales?

Home affordability has three inputs: home prices, mortgage terms and income. Unless you’re buying a home with only cash, you’re going to need a mortgage and, as mortgage rates go, so does the cost of homeownership, explains loan officer and HSH.com contributing writer Dan Green.

“Low mortgage rates support home prices,” says Keith Gumbinger, vice president of HSH.com. “Higher mortgage rates impinge on your affordability.”

While the U.S. economy continues to show grudging signs of improvement, economic troubles both here and abroad are contributing to our current low interest rate environment. As central banks keep short-term rates low and as investors continue to seek shelter for their assets, mortgage rates remain on a low and even path—something both homebuyers and refinancers can be thankful for.

Affordability equals increased home sales

Realtors and homebuilders have been beating the affordability drum for years now, and for good reason. According to the National Association of Homebuilders, their Housing Opportunity Index revealed that “72.9 percent of all new and existing homes sold in the third quarter of the year were affordable to families earning the national median income of $64,200″ (a near-record).

“With interest rates at historically low levels and markets across the country beginning to improve, homeownership is within reach of more households than it has been for nearly two decades,” said Bob Nielsen, chairman of the National Association of Home Builders (NAHB) and a home builder from Reno, Nev.

Mortgage rates must remain near historic lows

If we’re going to maintain a high level of affordability, mortgage rates will need to remain low. As of now, mortgage rates have maintained their historical lows, and although they have firmed up as of late, we don’t see that as a lasting trend (at least not at the moment).

According to the latest weekly mortgage rate report from HSH.com, the average rate for conforming 30-year fixed-rate mortgages rose by 5 basis points (0.05 percent) to 4.18 percent, while conforming 5/1 hybrid ARM rates remained unchanged from the previous week, closing the Wednesday-to-Tuesday wraparound weekly survey at an average of 3.00 percent.

“Rates for fixed-rate mortgages bumped higher on a little bit of enthusiasm about the economy’s prospects,” said Gumbinger. “Reports of solid retail sales for both Black Friday and Cyber Monday have left the impression that consumers are willing to help stimulate the economy, especially if prices are right.”

However, Gumbinger added, “This latest increase doesn’t indicate a new trend of sustained rising rates yet. These average rates are still well within the range of the last two months.”

More sales, higher prices

In a recent post on his blog, “The 4-Year ‘Buyer’s Market’ Ends. Home Prices to Rise In 2012,” Green writes that if the current homebuying trends continue, our nation’s buyer’s market may quickly shift to a seller’s market. The 33 percent contract failure rate detailed in the October existing-home sales report ”is gargantuan as compared to the failure rates of September 2011 (18 percent) and October 2010 (8 percent).”

Green continues, “It also signals that more buyers are trying to buy homes than are included in the Existing Home Sales figures. This is a ‘buy signal.’  Home supplies are falling and sales are increasing. Basic economics says home prices should start to rise in most U.S. markets, if they haven’t already.”

Mortgage rates matter more than home prices

But at the end of the day, as Green himself has explained on HSH.com, mortgage rates matter more than home prices when you’re thinking about buying a home and long-term affordability. “Therefore, if you’re buying a home and you’re in it for the long-haul, understand that you’ll save more money with a cheap mortgage than you will with a cheap house. Besides, the cheap house will need upgrades. The cheap mortgage never will.”

So when all is said and done, it’s still all about mortgage rates (but it couldn’t hurt to pull the trigger before home prices rise in your area).

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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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