Forewarning of Higher Rates in Midst of Housing Recovery

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With the release of the May Economic and Housing Outlook from Freddie Mac, we can firmly state that higher rates will slow home sales and new construction of homes.  Current potential for even higher rates than we’ve had all year will strongly affect homebuyer affordability.

Real GDP growth was originally predicted at 0.2% annualized, but all signs and trends are leading to a number that might just dip below zero.  With the European economy still in its current unstable state,  U.S. interest rates are continually rising and look like they will continue to do so for the rest of the year.

The remainder of the year has four main factors resting on its shoulders: international economic growth, domestic economic growth, Federal Reserve policies, and what the markets expect from these factors.  There will also be a detrimental unpredictability wrapped around the potential Federal policy changes as the central bank looks to raise the Federal Funds rate sometime in the near future (a few months or so).

Another outcome of the high rates is high affordability.  This was concluded based on the median priced home being affordable to the median earning home.  These calculations are interest rate heavy.  Currently with incomes and house prices constantly stable, a small spike in mortgage rates could easily decrease the amount of affordable metros to a number similar to 108.