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Homes Become Less Affordable as Rates Move Up

The recent rise in rates has led to a drop in the Housing Affordability Index as tracked by the Federal Reserve. Both existing and new home sales slowed towards the end of 2016 as a rise in rates pushed mortage rates higher. Rising interest rates tend to increase the cost factor when purchasing a home with a mortgage loan.

The two most feasible methods of raising the Affordability Index is by either having an increase in wages or by having a drop in housing prices. Historically, home prices tend to fall much faster than wages rise, since pay raises take time.

The Housing Affordability Index is negatively correlated to the 10-year Treasury Bond yield, meaning that as yields rise, the Affordability Index declines.

Source: St Loius Federal Reserve Bank