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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.

Metro Households No Longer Meeting Minimum Qualifying Income Increase in Minimum Qualifying Income at 5.5% Interest
Chicago 118,100 $5,900
Washington, D.C. 112,100 $9,800
Boston 93,900 $10,800
Los Angeles 86,300 $13,100
Philadelphia 85,500 $5,600
Atlanta 84,600 $4,700
Dallas-Fort Worth 81,500 $6,000
Phoenix 74,500 $6,000
Houston 69,900 $5,900
Riverside-San Bernardino 62,500 $8,300
Minneapolis-St. Paul 62,100 $6,000
Seattle-Tacoma 60,100 $11,300
Detroit 53,300 $4,000
Denver 47,400 $9,900
Baltimore 46,900 $6,300
Tampa 45,900 $5,200
Charlotte 39,500 $5,200
Orlando 39,200 $5,800
Las Vegas 38,700 $6,100
St. Louis 37,600 $3,900
Portland 37,300 $9,200
Sacramento 36,500 $8,100
Oakland 35,600 $18,200
Austin 32,700 $7,100
San Antonio 32,700 $5,200
San Diego 32,600 $14,400
Kansas City 31,600 $4,600
Columbus 31,500 $4,500
Orange County 31,100 $18,800
Indianapolis 29,900 $4,000
Miami 29,100 $8,300
Fort Lauderdale 27,000 $7,300
Cleveland 26,500 $3,300
Cincinnati 26,200 $3,800
Jacksonville 24,400 $5,700
West Palm Beach 22,500 $8,100
Milwaukee 19,400 $5,800
Salt Lake City 19,300 $7,300
San Francisco 11,700 $27,200
San Jose 11,500 $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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