Markets & Economy

Will rising mortgage rates undermine home prices?

Zillow: Affordability depends more on rates than in the past

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Thanks to freakishly low interest rates, many homeowners with mortgages are able to make their monthly house payments using a much smaller percentage of their income than has been the historical norm, an analysis by Zillow shows. But home prices are actually more expensive relative to median annual incomes than they were during the pre-boom years, which raises a troubling question: What happens when the economy improves and interest rates go up? Because housing affordability is more highly dependent on interest rates than it has been in the past, when rates go up, home values will either have to remain stagnant while incomes catch up, or home values may even have to fall in some markets, said Stan Humphries, Zillow's chief economist. Some homebuyers could find themselves newly underwater if rising mortgage interest rates depress home values in their markets. "Those buyers purchasing with little money down and high initial mortgage balances will be more at risk for slipping ...