According to a recent survey by HSH.com, nearly 40% of respondents said they won't be buying a house this year because they can't afford it.

In a time of meager income growth (which we have experienced since the recession began), low mortgage rates have played an integral role in enhancing affordability and reinflating home prices. Why? Low rates increase the ability of a given income to afford a higher-priced home.

So instead of another article warning that "mortgage rates are going to rise later this year," we instead wanted to focus on just how significant this low-mortgage-rate environment has been to home buyers and refinancers.

Low rates: enhancing affordability
Over the last 10 years, conforming 30-year fixed mortgage rates have been as high a 6.8% and as low as 3.28%. This decline to rock-bottom levels meant that on a peak-to-trough basis, buying power improved considerably -- and remains very strong.

At the peak in 2006 (graph below), a monthly payment of $652 was enough to borrow $100,000. When mortgage rates fell to 3.48%, that same $652 would have been sufficient to borrow $145,544 -- a 45% improvement in the amount of mortgage debt that a given income could carry.

Low mortgage rates increase buying power

Low interest rates boost your buying power
As the Fed looks to return interest rates to "normal" over time, it bears noting that the interest rate associated with "normal" continues to shrink. Over the last 10 years -- a considerable time frame -- conforming 30-year fixed-rate mortgages have averaged just 5.09%. Over the last five years, conforming 30-year fixed-rate mortgages have averaged just 4.21%.

In order to demonstrate how lower interest rates have improved buying power, we calculated the monthly payment needed to cover a $100,000 loan in 2006 when the conforming 30-year fixed peaked at 6.8%. Using this monthly payment as a constant, we calculated the loan amount this figure would cover at different interest rates over time. In all cases moving forward, there has been a material improvement as these rates have remained below where we began.

Time Period

Mortgage   Rate

Monthly P&I Payment

Loan Amount This Will Carry

2006 (peak)

6.80%

$651.93

$100,000

2012 (trough)

3.48%

$651.93

$145,544

5-year avg.

4.21%

$651.93

$133,155

Split: 5-10 year avg.

4.65%

$651.93

$126,432

10-year avg.

5.09%

$651.93

$120,208

Present

3.93%

$651.93

$137,715

It's not clear yet where mortgage rates will eventually land once the Fed does raise rates, but when it does, purchasing power will be crimped. So, absent stronger income growth, keeping the housing market going may be a challenge.

Income growth will be the savior
The only way to offset the rise in interest rates is with stronger income growth. Income growth can outstrip an increase in rates or even home prices. Purchasing power would also increase with income growth, and the housing market would strengthen. However, income growth has been fairly weak in the recovery to date, and this is why you'll often hear experts and pundits expressing concern about the Fed's eventual campaign to again lift interest rates.

In order just to keep up, or at least to preserve a given level of affordability, incomes will need to keep pace with interest rate increases. Failing that, the other market-based lever to preserve affordability would be declines in home prices -- something few would like to see.

As the economy recovers, the slow growth in incomes will offset rising mortgage rates somewhat, but the impact of rising rates on potential homebuyers is something that will bear watching going forward.

This article originally appeared on hsh.com.

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