Posted on: Sunday, July 3, 2005
Rising rates may price more out of market
| • | Housing bubble? Experts say no |
By Andrew Gomes
Advertiser Staff Writer
Economists generally agree that a combined rise in interest rates and continued climb in home values will dramatically slow housing prices.
With every click up in interest rates, homes become less affordable.
Between 2000 and 2004, it typically took about 30 percent of a family's median annual income to pay the mortgage on a median priced single-family home on O'ahu.
If the average 30-year mortgage — now at around 5.5 percent — reaches 6 percent, it could take about 40 percent of a family's median income to afford roughly $550,000 for a home, according to Bank of Hawaii economist Paul Brewbaker.
"That's a big stretch," Brewbaker said, noting that a third of income goes to taxes.
Assuming 6.5 percent interest and 3 percent higher income next year, it would take half of the median income to buy a $656,640 home.
At that level fewer people would be able to buy, Brewbaker said.
Two previous points of least affordability were reached in Hawai'i in 1981 and 1990. To match those years, interest rates would have to climb to 6.5 percent to 7 percent with single-family homes selling for $600,000 to $700,000, Brewbaker said.
It's hard to predict where interest rates will move, especially after many economists were wrong last year when they believed interest rates would rise from about 6 percent a year ago to 7 percent about now.
The Mortgage Bankers Association now forecasts that rates will reach 6 percent by year's end, and 6.5 percent by the middle of next year.
That tends to support the belief of Hawai'i real estate experts who say housing prices could continue to rise for another year or two and then level off.
