| For now, mortgage rates are
still near historically low levels. But more and more, economists
are beginning to worry about a resurgence in inflation and thus
rates. That, of course, would remove one of the key underpinnings of
the recent boom in real estate.
Friday's unexpectedly strong jobs report won't
help. Soon after the report's release, bond prices sank and the
yield on the 10-year note jumped to 4.13 percent from 3.88 percent.
Discussion quickly turned to whether this latest sign of economic
strength would force the Federal Reserve to raise short-term rates
sooner rather than later.
Interest rates on a 30-year fixed-rate mortgage,
the most popular U.S. home loan, averaged 5.52 percent for the week
ending April 1.
But what happens if rates start ticking up?
Watch out for rising rates
All things being equal, home prices could suffer
when rates go up. After all, buyers who could afford a $1,400
monthly payment on a $250,000 mortgage when rates are 5.5 percent
may not be willing to pay as much for a house if rates go to 7
percent, in which case the monthly payment would be $1,660.
"Let's imagine rates go to 7 percent, I think that
would take the air out of the bubble pretty quickly," said Dean
Baker, co-director of the Center for Economic and Policy Research.
Other economists say the relationship between home
prices and interest rates isn't quite as direct. For one, when
rising rates go hand-in-hand with an economic recovery, as they
often do, better job prospects partially offset the effects of
higher rates.
"If rates rise it's because the economy is getting
better," said JP Morgan Chase senior economists Jim Glassman during
a recent National Association of Home Builders press conference.
Also, when rates go up, buyers often opt for
adjustable rate mortgages (ARMs), which have lower rates than fixed
loans. "When rates started picking up after the last refi boom in
1993, people didn't leave the market, they just shifted into ARMs,"
said Eric Belsky, executive director of Harvard's Joint Center for
Housing Studies.
Forecast for the coming years
Last week, the Mortgage Bankers Association said
it expects the 30-year fixed rate mortgage to reach 5.9 percent by
the end of 2004 and 6.2 percent by the end of 2005. But, favorable
demographics and a growing economy will continue pushing up home
prices, according to MBA chief economist Douglas Duncan, albeit at a
slower rate than they have risen in recent years.
The median price of an existing single-family home
is $172,200 as of the first quarter of this year, according to the
MBA. At this time next year, the MBA is predicting, the median will
be $177,400, a 3 percent increase.
As Baker sees it, however, even a slowing of price
appreciation could have repercussions. "People buying in bubble
areas are going to look at a house in a different way if they don't
think its price is going to go up at 15 or 20 above the rate of
inflation," he said. "Before you buy, ask yourself whether it's
still worth it even if home prices come down."
Some markets, some homeowners, more vulnerable
Though there's never been a nationwide decline in
real estate prices, individual markets have suffered plenty -- see
"Real estate horror stories."
As such, some markets could surely feel more pain
than others. "I'd be most concerned in places where housing
affordability is an issue because the effects of rising interest
rates are even more pronounced," said David Stiff, director of
economic research for Fiserv Case Shiller Weiss.
According to the National Association of Realtors
affordability index, Boston, San Diego, San Francisco and
Washington D.C. were among the least affordable markets as of
November 2003.
Among the most affordable places are Buffalo,
N.Y., El Paso, Texas, Fort Wayne, Ind. and Peoria, Ill. In these
cities, median-income families make more than enough to pay for
median-priced homes.
"In cheaper markets interest rates probably won't
matter as much as the local economy," Stiff added. "These are places
where new supply matches new demand, and you just have steady
appreciation."
Similarly, not all homeowners will suffer the
same. If you're not planning to move for years, a decline in home
values won't have as much of an impact.
But a decline could be a real problem for
Americans who have taken advantage of the run up in prices to do
cash-out refinancings. They could very well owe more than their
house is worth -- bad news if they are forced to sell. 
For more information call Community Mortgage.
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