Rising mortgage rates and Southern California real estate

Southern California home prices have had 13 consecutive months of year-over-year gains of 20% or more. Much of this run-up has been caused largely by two things: moving money from stocks into real estate, and low interest rates.

So, what will happen as rates rise?

By the end of this year 30-year mortgage rates are expected to rise to between 6.4 - 7.0 percent. This would make homes in Los Angeles and Southern California even more unaffordable and further limit the pool of potential home buyers. Many analysts feel this would push home prices down.

Even optimists admit that double digit gains cannot be sustained with rising interest rates. In their opinion, home prices won't really decrease, but appreciation will be limited more closely to the rate of inflation. Of course, if rates increase unexpectedly, all bets are off.

Additionally, increasing rates could have a significant impact on recent homebuyers that have utilized variable rate loans in order to 'afford' their real estate purchase. This could increase foreclosures and also push home prices down.

So, do you wait for higher mortgage rates to force prices lower, or do you take advantage of low interest rates and hope that the real estate market doesn't pop?

That's a very good question.