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Some Markets to Feel Impact of Interest Rates More than Others

It’s no surprise that the trajectory of interest rates is a hot topic in today’s economy, particularly in a red-hot housing market. Prices are near all-time highs, inventory remains far short of healthy levels and demand for homes is strong. As the fed taps the breaks on the economy, the implications of rising mortgage rates will be uneven. Markets at the top of this list will see a sizable number of households that will no longer qualify for a median-priced home if interest rates move from 4.5 percent to 5.5 percent. At the other end of the spectrum, interest rates will have a limited impact on the number of households that are no longer able to qualify for a home.

What does this mean for investors?

The markets at the top of this list will have the greatest number of renters remaining in the buyer pool, making them attractive targets for investors from a tenant-demand perspective. In addition to analyzing how many would-be homebuyers will soon be left behind by the housing market, investors all need to balance purchase decisions by potential returns. Chicago, Atlanta, Dallas-Fort Worth, Phoenix and Houston have the most attractive yields among the top 10, offering investors an opportunity to acquire assets and rest assured that rental demand will remain healthy. In the higher-priced metros among the top 10, including Washington, D.C., Boston, Los Angeles, Philadelphia and Riverside-San Bernardino, returns are not as attractive and investment capital can go further elsewhere.

San Francisco and San Jose are at the bottom of the list, mostly due to the already small buyer pool. Prices in these areas have already left most potential buyers on the sidelines regardless of interest rates. In San Jose, only 10 percent of households meet minimum qualifying income, and only 11 percent of San Francisco households reach the criteria. As a result, growth of the rental pool will need to occur though household formation rather than an increase in interest rates.

MetroHouseholds No Longer Meeting Minimum Qualifying IncomeIncrease in Minimum Qualifying Income at 5.5% Interest
Chicago118,100$5,900
Washington, D.C.112,100$9,800
Boston93,900$10,800
Los Angeles86,300$13,100
Philadelphia85,500$5,600
Atlanta84,600$4,700
Dallas-Fort Worth81,500$6,000
Phoenix74,500$6,000
Houston69,900$5,900
Riverside-San Bernardino62,500$8,300
Minneapolis-St. Paul62,100$6,000
Seattle-Tacoma60,100$11,300
Detroit53,300$4,000
Denver47,400$9,900
Baltimore46,900$6,300
Tampa45,900$5,200
Charlotte39,500$5,200
Orlando39,200$5,800
Las Vegas38,700$6,100
St. Louis37,600$3,900
Portland37,300$9,200
Sacramento36,500$8,100
Oakland35,600$18,200
Austin32,700$7,100
San Antonio32,700$5,200
San Diego32,600$14,400
Kansas City31,600$4,600
Columbus31,500$4,500
Orange County31,100$18,800
Indianapolis29,900$4,000
Miami29,100$8,300
Fort Lauderdale27,000$7,300
Cleveland26,500$3,300
Cincinnati26,200$3,800
Jacksonville24,400$5,700
West Palm Beach22,500$8,100
Milwaukee19,400$5,800
Salt Lake City19,300$7,300
San Francisco11,700$27,200
San Jose11,500$27,400

 

Methodology: HomeUnion® Research Services calculated mortgage payments on a median-priced home in 40 major metros as of the end of 2017. Mortgage payments at 4.5 percent and 5.5 percent were compared with household income based on 17 different income tranches. For the purposes of this study, the number of households was deemed to be uniform through each tranche. Tax rates were based on the rate in each metro.

 

Sources: HomeUnion® Research Services, National Association of Realtors, U.S. Census Bureau

 

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