Higher Mortgage Rates Could Revitalize Smaller Home Sales

Julie C. Nichols General

The Motley Fool – Jordan Wathen

It’s a billion-dollar question: Following a 30-year bull run in bonds and falling interest rates, can the housing market survive a rising-rate environment? Rising rates have a direct impact on housing affordability. Mortgages at a 5.5% annual rate are 12% more expensive than at a 4.5% rate. At 6.5%, monthly mortgage payments are nearly 25% more costly than at 4.5% As rates go up, the amount a buyer can afford to spend on a home goes down, all else equal. But will it put a damper on a real estate recovery? Bond values weren’t the only thing going up over the last 30 years. Data obtained from the U.S. Census shows the average newly built American home swelled in size, too.

The average home built in 1975 was 1,535 square feet. By 2010, the average build came in at 2,169 square feet. What’s behind the meteoric rise in home sizes? Interest rates could be to blame. In fact, when you look at a chart of home sizes by year, they seem to be inversely related to interest rates. As interest rates fell in the late 1970s, home sizes grew. As rates rocketed in the early 1980s, home sizes contracted. After reaching a peak in the 1980s, mortgage rates have fallen precipitously, and homes have grown in almost every single year since.

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