Why Rising Interest Rates Could Eventually Curb Price Gains via WSJ

Rising home prices are raising concerns among some housing analysts that prices could again become unaffordable if price gains outpace income growth.

Two charts help illustrate these concerns. First, it’s useful to compare median home prices to incomes to determine whether housing is “overvalued” or “undervalued.” Data from Moody’s Analytics shows that at the end of last September, the median U.S. home price was around 1.7 times the household income. That price-to-income ratio stood at around 1.9 for the 15-year period beginning in 1989, meaning home prices were still slightly undervalued.

Why hasn’t housing affordability been dented by rising prices? That’s where the second chart comes in handy: mortgage rates are so low that any increases in price are being offset by falling interest rates, which allow homeowners to qualify for more debt without increasing their monthly payment. This is important because many home buyers approach the buying process based on the monthly payment they can qualify for.

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