Escalating home prices stem mainly from strong basis demands for shelter, facilitated by low mortgage rates and ample availability of mortgage credit

Modern Machine Shop, August, 2005

Escalating home prices stem mainly from strong basis demands for shelter, facilitated by low mortgage rates and ample availability of mortgage credit. The is compounded by the limited supply of land on which to build new homes. As the costs of financing home ownership become increasingly out of reach of average workers, buyers seek ways to hold down monthly payments by signing up for interest-only loans or an adjustable rate. Mortgage lenders, facing increased competition, readily accommodate them. Some buyers opt for more lenient loan terms so that they can acquire a larger home and profit from the price appreciation. Others leverage their financial positions to buy investment properties, speculating that increases will continue or even accelerate.

Analysts look for a moderate increase in mortgage rates. In that scenario, the rise in home prices seems likely to slow considerably at the national level. In some metropolitan areas where home prices have risen sharply, declines can't be ruled out. This might lead to a slowdown in consumer spending, but not enough to seriously weaken the economy.