This post was contributed by a community member. The views expressed here are the author's own.

Health & Fitness

What will happen to values with higher mortgage rates?

I am not officially an Economist and I do not play one on TV, however, looking at the numbers can lead to making predictions on the future of housing values.

Higher interest rates eventually lead to lower home values UNLESS they are offset (see below).  Most of the US workforce earns a fixed amount of income per year thus they have a set amount available to pay for a mortgage (Y).  That income can grow over time; that income can be supplemented by a union; that income could be subsidized by other income streams but in the end, that income remains relatively steady thus your mortgage payment wants to remain relatively steady.

The following are a list of potential offsets to income:

Find out what's happening in La Jollawith free, real-time updates from Patch.

  1. You pair up via marriage or any number of non-traditional methods giving you two incomes (or more) in one household.  Household income.
  2. Regardless of increasing values, you just increase your down payment to keep your monthly payments at Y.
  3. You get a substantial raise, not a paltry one, but a substantial one because the economy is doing so well that you finally begin to benefit.
  4. Any combination of the above.

What I am trying to say is that if I make X then I only have Y available to pay for a home.  The key to making a home purchase is finding a home that matches my Y, not your Y or your family's Y.

The graph below represents various Y's.  Again, your Y is what you can afford to pay for a mortgage.

Find out what's happening in La Jollawith free, real-time updates from Patch.

All else being equal in your world, note how values dramatically move downward as interest rates move from 3.50% to 4.50% and then to 7.00% (Keep in mind that average mortgage interest rates were in the range of 8% - 18% from 1981 - 2000.

For example, a monthly payment of $3000.00 (Not Including Taxes and Insurance) buys you a home of approximately $670,000.00 at an interest rate of 3.50% but only buys you $450,000.00 at 7.00%.  That is an enormous reduction in buying power.  Offsets to get you into the $670,000.00 home are different mortgage products like ARM's that may carry lower rates, larger down payments to cover the difference, or maybe your income has doubled?

Do I predict home values will be lower in the future if interest rates continue to rise?  Yes I do but I do hope I will be wrong as that will mean a thriving economy with wonderful incomes.

We’ve removed the ability to reply as we work to make improvements. Learn more here

The views expressed in this post are the author's own. Want to post on Patch?