The housing market has shown several consecutive months of improvement in home prices and buyer demand. The Case-Schiller index of home prices, released recently, showed a sixth straight month of year-over-year increases. Real estate website Trulia compiles a “housing barometer” that measures how close the real estate market is back to normal based on housing starts, existing-home sales, and delinquency and foreclosure statistics. Trulia’s most recent housing barometer reading put the housing market at 47% back to normal.
A recent TIME magazine article questions what’s really behind the real estate market’s improvement.
Tim Iacano of Iacano Research gives much of the credit for the recovery and rise in home prices to the Federal Reserve. The Fed’s aggressive efforts to stimulate the economy. Their quantitative easing (QE) program, aimed at keeping mortgage rates low, has prompted mortgage rates to fall to all-time lows in recent months and weeks.
Lower interest rates stimulate the economy by increasing home values. When the interest rate a buyer needs to pay in order to finance the purchase of a home is lowered, the price at which a buyer can afford to purchase the home is raised.
For example, Iacano points out that a buyer today could purchase a house worth $280,000 and if he’s able to snag a record-breaking 3.3 percent mortgage rate, he’ll have a $1,100 per month mortgage payment.
“Even if mortgage rates moved back up to their 20-year average rate of 6.5 percent (what many thought were simply unbelievable rates when they first dropped that low last decade), that same $1,100 mortgage payment would finance a home purchase of just $193,000, not the current $279,000,” Iacano points out. “The difference between these two prices is nearly 50 percent!”
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