Thursday, June 14, 2007

Rising mortgage rates mean home prices MUST go down

According to the AP,
"Rates on 30-year mortgages rose for a fifth straight week, hitting the highest level in 11 months as prospects dimmed further for possible rate cuts from the Federal Reserve.

Mortgage giant Freddie Mac reported Thursday that 30-year, fixed-rate mortgages averaged 6.74 percent this week. That was up from 6.53 percent last week and marked the biggest one-week rise in 30-year rates in more than three years. The five consecutive increases have pushed 30-year mortgages to their highest level since they were at 6.80 percent for the week ending July 20, 2006.

"Mortgage rates moved sharply upward this week," said Frank Nothaft, Freddie Mac's chief economist. "These moves parallel rising yields on Treasury securities as concerns about inflation pressures and continuing strength of consumer and business spending have dimmed hopes for an interest rate cut."

The monthly payment required for a mortgage depends on the purchase price and the mortgage rate...if rates go up, the portion of the monthly payment going to interest increases. Whatever a buyer's maximum that they can devote to the mortgage payment, if the interest portion increases, the purchase price portion must decrease. Decreasing rates drove home prices up the last 7 years; increasing rates will force home prices down regardless of supply factors.

When I bought a home 6 years ago, I was happy to get a 7.00% fixed and thought rates would never go lower. Silly me...

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