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The Credit Crunch & Mortgage Rates

Back in July I saw this telling graphic on the Times’ web site:

It would appear we are looking at a 30 year fixed rate nearly 1.5% higher than the low of 2003. Let’s compare the above to the 10 year Treasury chart below:

It’s clear that mortgage rates did not follow the Treasury’s recent rate decline due to the subprime issues. Looking at the impact on home purchases, I calculate that the $1380/mo payment that would finance a $250K loan at 5.25% will now only support a $213K loan at 6.71%. This is nearly 15% less purchasing power due to interest rates. I’ve remarked in the past that the rise in home prices (by that I meant median home prices) did not show any bubble forming. In two articles I wrote, aptly titled Housing Bubble and Housing Bubble Part 2, I offer charts showing wage and interest rate adjusted cost of home ownership, and from the late 80’s right to 2004 showed no decrease in affordability at all.

Joe

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