The average rate on the 30-year fixed mortgage dropped to 3.68 percent last week, according to the Mortgage Bankers Association. From 1985 through 1999, rates ranged from 6 to 13 percent. Present low rates have allowed buyers to purchase more expensive homes, and the mortgage payment is taking less out of their monthly paychecks.
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Back in the mid-eighties and nineties, Americans spent nearly 20 percent of their median monthly incomes on their home loans—compared to just 12.5 percent today, according to Zillow.
The trouble is that wages have either stagnated or dropped at the same time that home values are rising. Pre-bubble, U.S. homebuyers spent 2.6 times their median annual incomes on the purchase price of a typical home, but now they are spending three times their incomes—meaning homes are 14.5 percent more expensive relative to income, according to Zillow. That is all made possible by government-subsidized, record low rates.
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"The days of historically high levels of housing affordability are numbered," said Zillow Chief Economist Stan Humphries. "Current affordability is almost entirely dependent on low interest rates, and there's no doubt that rates will begin to rise in the next few years."
Rates will rise because the Federal Reserve will inevitably have to get out of the business of buying agency mortgage-backed securities, which currently drives down rates. This won't happen immediately, but it will in the next two to three years.