How Fed Policy Distorts Katy Texas Home Prices

The Katy Texas real estate market has been on a tear recently.  The market is as tight as it’s ever been, even more so than the peak in 2006.  Recent reports are suggesting that the U.S. housing market is recovering and that higher home prices are a signal of the recovery.  Trouble is, the recovery is not organic.  Tim Oacono provides a nice graphical representation of how record low mortgage rates courtesy of the Federal Reserve have helpt to boost home prices.  The reality is that home buyers often pick a payment, not a mortgage amount, and it’s those monthly cash outflows that determine debt-to-income ratios for mortgage qualification purposes.

As Oacono notes, when you look at what’s driving home prices, it’s not organic growth.  Low inventory has helped the situation for sure, but the dramatic increase in purchasing power courtesy of low rates is really the biggest factor in higher home prices seen this year.  The decline in mortgage rates just in the past year accounts for a roughly 15% increase in purchasing power.  Any market that didn’t see a corresponding price gain isn’t really seeing price recovery.  If mortgage rates were to move back to their 20-year average (somewhere around 6.5 percent) the same $1100 mortgage payment would finance a home purchase of just $193,000 rather than the current $279,000.  That’s a difference of almost 50%.  Plugging some numbers into your favorite mortgage calulator, you may be surprised by the results.

Trackbacks/Pingbacks

  1. Katy Texas & West Houston Real Estate Market - November 2012 - December 19, 2012

    [...] power courtesy of lower rates, prices should have risen by about 15 percent.  It’s these distortions in the market that are keeping builders and their forecasters up at night, and thus keeping a lid on available [...]

  2. Katy Texas Home Prices Rise In Response To Lower Mortgage Rates - January 16, 2013

    [...] releases, you’ll find little mention of the effect of the record low mortgage rates, and the market distortions created by the Federal Reserve.  For all the talk about the red-hot real estate markets in the Houston area, it’s worth [...]

  3. Churchill Farms - Getting What You Pay For With Katy Texas New Homes - January 29, 2013

    [...] I am interested in what’s going on in Churchill Farms because I think it speaks to the market imbalances we are seeing with real estate around the country.  With low inventory and tight credit [...]

Leave a Reply