As we see Twin Cities home prices bottom (and likely tick up) and interest rates begin to rise, home affordability in the Twin Cities is likely to fall in 2012 and beyond.
For years we’ve seen home prices decline. This decline wooed us into a sense that home affordability would keep getting better the longer we waited. Well in the last 6 months we’ve seen a dramatic decrease in the number of homes for sale while also seeing an equally large increase in the number of buyers in the market, which has caused overall months supply of housing drop 37% and likely to drop further this spring. This is quickly firming home prices in the Twin Cities and will likely lead to small increases in prices this year.
With mortgage rates hovering around 4% and still close to all-time lows, as the economy continues to improve it is likely we will see interest rates rise. Even a modest increase of .5% has a substantial change to monthly payments since rates are so low right now. Rising rates will force buyers to decrease their purchase price some or require them to pay a higher monthly payment for the same house.
There are many factors that play into future real estate prices and interest rates, but this is a possible scenario for 2012:
Even though this decline looks extreme, it would still leave us with levels of home affordability we saw in 2010 – is that hard to imagine? Buyers who have been sitting on the sidelines waiting for the bottom in the market will quickly find the market bottom is now behind us.
