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October 1, 2014

Bigger Mortgage Rates, Smaller Homes?

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Bigger Mortgage Rates, Smaller Homes?

As the costs of mortgages get bigger, could the size of homes buyers purchase get smaller?

According to financial Web site The Motley Fool, interest rates and home size are closely tied together. “As interest rates fell in the late 1970s, home sizes grew,” Motley Fool reports. “As rates rocketed in the early 1980s, home sizes contracted. After reaching a peak in the 1980s, mortgage rates have fallen precipitously, and homes have grown in almost every single year since.”

That's because as mortgage rates rise — as they are now — buyers can afford less. Mortgages at a 5.5 percent annual rate are 12 percent more expensive than at a 4.5 percent rate, Motley Fool notes. If rates climbed up to 6.5 percent — where they were about six years ago — monthly mortgage payments would be nearly 25 percent more costly than a 4.5 percent mortgage rate. 

In 1975, the average home built was 1,535 square feet. In 2010, that grew to 2,169 square feet, according to U.S. Census data. 

As mortgage rates rise again, buyers who are priced out may be able to still jump in by purchasing a smaller home, according to Motley Fool. Home buyers may be lured to smaller homes constructed 30 or 40 years ago, which could require some remodeling. 

Source: “Higher Mortgage Rates Could Revitalize Smaller Home Sales,” The  Motley Fool (Sept. 2, 2013)

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