Study Calculates Rate Impact on Home Values
Mortgage rate hikes have had a significant negative impact on house prices throughout the U.S. reducing prices by more than 10%, according to new research by Columbia Business School real estate professor Christopher J. Mayer and senior vice dean Paul Milstein.
Mr. Mayer predicts "prices will keep falling nationwide due to a combination of continued deterioration in the mortgage markets and economic fundamentals."
These findings are concerning since he finds these problems have the power to place the nation's housing "in a downward spiral that is hard to break."
It is a cause-and-effect scenario triggered by the fact that house prices "are very sensitive to fluctuations in mortgage rates," the report notes.
What is different now is that if for the past 20 years mortgage rates have averaged 1.6% higher than the 10-year Treasury rate, currently the average rate is 2.4% higher than the Treasury rate.
It has increased the cost of first-time homeownership and most importantly - given the unprecedented number of subprime and ARM holders looking forward to refinancing their mortgage - makes refinancing into lower rates much more difficult.
Consequently, higher costs tend to lower demand, which is compensated by a basic supply-and-demand effect that leads home prices to drop.
The study examined house-pricing data in 19 metropolitan areas in the U.S.
Mr. Mayer used the current and calculated data to establish what is the rate change effect on housing costs.
He determined the relative cost of owning a home in today's distressed mortgage market. Than he compared this ratio with what the relative cost of owning a home would be if prices were calculated based on where the price range would have been "if the mortgage market were behaving as it has over the last few decades."
In today's market, the final analysis shows, mortgage rate hikes have raised the full cost of homeownership by between 10% and 20%.
Based on Mr. Mayer's model, the study found that housing markets across the country are expected to continue to see price declines as mortgage rates increase. For example, in the so-called bubble markets of Miami, Tampa and Phoenix, prices may decline by at least another 10% to 15%, further deepening the crisis in these areas. (c) 2008 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com/ http://www.sourcemedia.com/