Home Prices to Keep Rising, Adding to Mortgage Costs

Couple looking at documents with financial bills

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Paying a mortgage is only going to get more expensive this year, and not because of interest rates, according to a recent report by online real estate data marketplace Zillow.

The monthly mortgage payment on a typical U.S. home will rise to $952 a month by the end of the year, up from $862 last December, as house prices continue to rise unabated, the report said. And that’s assuming that interest rates hold around the current average of 2.68% for a 30-year fixed rate, a figure that is close to a record low.

The ultra-low rates have helped fuel a homebuying frenzy, along with city-dwellers seeking to live away from crowded urban areas amid the pandemic. Those factors have led inventory to nearly run dry and prices to pop even as the pandemic’s winter resurgence has stifled the economy

There are no signs of the market returning to earth anytime soon in Zillow’s 2021 forecast, which says the average home price will rise 10.5% from the $266,104 price as of December on the strength of continued low mortgage rates and an improving economy. That compares to an 8.4% increase in home values in December from a year earlier.

Zillow also forecasts a 21.9% gain in the number of sales for the year, the biggest since the early 1980s.

The rates have helped keep housing affordable even as prices have risen, according to a recent analysis by ATTOM Data Solutions. In fact, 68% of first-time homebuyers were surprised by how much they could get for their money, thanks to the low rates, according to a new survey by Realtor.com.

"For someone ready to buy, jumping in sooner rather than later could mean a savings of hundreds of dollars a month,” Zillow home trends expert Amanda Pendleton said in a statement.

Eventually, mortgage rates are expected to rise along with the economic recovery, according to Zillow’s report. Rising interest rates would have a profound impact on affordability: if they rise to just 3%, still exceptionally low by historical standards, the typical monthly payment would increase 15% to $992, assuming the 10.5% price growth prediction is borne out.