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.

aaronlaymanHow Fed Policy Distorts Katy Texas Home Prices