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Housing more affordable, Fed study says

Well here’s an interesting spin on the high cost of real estate.  Because of low interest rates and increases in personal income, the cost of housing has actually DECREASED over the past two decades.

Source: Bubble? Housing more affordable, study says

Even though home prices are on the rise, research by the Federal Reserve Bank of Chicago reveals that income gains and low interest rates have made housing more affordable than during the previous decade.

Based on the mortgage servicing index created by the Chicago bank’s senior economist, Richard Rosen, 15.8 percent of the median household income was necessary to cover the monthly mortgage payment on a median-priced home in 2004, down from 20 percent needed in the mid-1980s and 18 percent in the early 1990s.

Rosen believes a boost in mortgage rates to 6.5 percent would spark a 6.5 percent decline in home prices. He further calculates that prices would fall 15.5 percent if rates hit 7.5 percent.

However, Doug Duncan, chief economist for the Mortgage Bankers Association, notes that higher interest rates in the 1980s led to a drop in both sales and the supply of homes on the market, with the resulting supply-and-demand imbalance actually spurring price gains.

Source: Chicago Tribune (06/01/05); Umberger, Mary; Fitzgerald, Alison

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