2005 in review!

For all of the noise made this year about rising mortgage interest rates, when economists look back to review the trends of the time years from now, they'll wonder at the hue and cry: for 2005, theannual average for the overall 30-year FRM was a flat 6%, just afour-basis point increase from 2004's final yearly average. Infact, the average for all of 2003 was just about the same, too:5.99%. Truly, we have enjoyed a remarkable run for interest rates,and there are no current signs that the end of low rates is near.However, the public perception of what constitutes a "low" ratehas changed measurably this year. Short-term interest rates, whilestill favorable, aren't as low as in recent years, but long-termrates have shown little determination to rise even to levelsdeemed 'reasonable' just a few years ago.As home buyers know full well, the nominal rate on a mortgage isan indicator of how much money a given income stream will be ableto manage. Along with other factors, the lower the rate, the moremoney can be borrowed; conversely, a given income can afford tofinance a wider price range of homes. This improves affordability,and many wanna-be homebuyers jump into the fray, until such demandcauses home prices to begin rising faster than interest rates arefalling. At some point, a balance is reached; after that, themomentum of one (prices, in this case) outweighs the other (effectof lower rates) and affordability begins to suffer, followed bysales numbers, followed by prices. To what degree all these willoccur (and at what speed) is unknowable, since real estate marketstend to be very localized; the so-called 'real estate bubble' isin fact a froth made up of many smaller bubbles.