Trulia just reported that asking prices have jumped dramatically and the increase is accelerating: (Nationwide)
Year-Over-Year prices jumped 10.7%
Quarter-Over-Quarter prices jumped 4.1% (16.4% annualized)
Month-Over-Month prices jumped 1.5% (18% annualized)
No expert is expecting home prices to shoot up 18% in the next twelve months. If anything, price appreciation may slow as rates and inventories increase. Investors will begin to slow their purchases and the first-time buyers expected to take their place will be working within a pre-set budget in many cases.
Let’s look at an example: A young couple is looking for a home and have predetermined that their budget will only allow them to spend $1,000 a month on a mortgage. At today’s mortgage rate of 4.5%, they could afford a $200,000 mortgage ($1,013 principal & interest). However, if rates jump to 5%, they would have to lower their mortgage amount to $190,000 in order to keep their monthly payment where they need it ($1,020). At 5.5%, the mortgage would need to be no more than $180,000 ($1,022).
This decrease in buyers’ purchasing power will have an impact on home values going forward. I do not believe it will cause a decrease in prices. However, I do believe it will likely cause current rates of appreciation to slow.
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