Mortgage Rates Escalate; Overvalued Markets Dominate Florida

As mortgage rates have surged to their highest level in four years, housing markets across the nation are feeling the effects. Home affordability and overall home prices are near record levels, as overvalued real estate markets are no longer on the decline. Quite the opposite, in fact.

“I think it’s indisputable that demand in the housing market has declined in the past few months,” says Richard DeKaser, chief economist for National City Corp., an Ohio-based mortgage banker. “It’s very clear that rising interest rates figure very large in that decline.”

Rising rates had already begun to take their toll in the fourth quarter of 2005, when the 30-year mortgage averaged 6.22 percent, according to a report released Monday from Global Insight.

The report figures 71 of the 299 largest U.S. housing markets were “extremely overvalued” at year’s end, up from 62 markets a quarter earlier.

The report arrives at a fair market value based on population, income and interest rates and factors in historical premiums or discounts.

Rates, typically, have a direct affect on affordability. For example, a jump in interest rates from 6 percent to 7 percent on a 30-year loan adds about 10 percent to a monthly mortgage bill. A homeowner who financed a loan of $200,000 at 6 percent would pay about $1,200 a month. At 7 percent, the bill would come to $1,330.

As rates rise, homebuyers who were already stretched may start demanding lower prices. “Low rates had offset unaffordability in past years,” said DeKaser.

California and Florida accounted for 18 of the 20 most overvalued markets, with Naples, Fla. leading the way. A median home in Naples now costs $367,100, according to the Office of Federal Housing Enterprise Oversight (OFHEO), nearly double what the study’s authors estimate it should.

The issue of Florida home loan affordability is one that all cities must wrestle with. Areas such as Broward County and Jacksonville have begun making plans to assist future residents.