Real Estate Values Set Record Nationally

U.S. home prices jumped 12.1 percent in April from a year ago, the most since March 2006. More buyers and a limited supply of available homes have lifted prices in most cities across the country, a sign of a broad-based housing recovery.

The Standard & Poor’s/Case-Shiller 20-city home price index released recently also rose 2.5 percent in April from March, the biggest month-over-month gain on records dating back to 2000. Prices rose from a year earlier in all 20 cities for the fourth straight month. Twelve cities posted double-digit gains.

The housing recovery is looking more sustainable and should continue to boost economic growth this year, offsetting some of the drag from higher taxes and federal spending cuts. Steady job gains and low mortgage rates have encouraged more people to buy homes.

David Blitzer, chairman of the index committee, said the housing recovery should continue even with mortgage rates rising. Borrowing rates have jumped after Federal Reserve Chairman Ben Bernanke said recently that the Fed could slow its bond-purchase program, which is intended to keep long-term interest rates low.

Prices are rising because demand is up and fewer homes are available for sale. That's made builders more optimistic about their prospects, leading to more construction and jobs.

The index covers roughly half of U.S. homes. It measures prices compared with those in January 2000 and creates a three-month moving average. The April figures are the latest available.

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Rising Mortgage Rates Raising Concerns

Although still low by historic standards, the recent increase in mortgage rates have put a damper on a home refinancing boom and will make buying a home noticeably more expensive for borrowers. What's more, some experts say, the rapid run-up could pose a threat to consumer confidence, delivering a blow to the recovering housing markets and even beyond.

Mortgage rates have jumped a full percentage point above their recent record lows, raising costs for borrowers and questions about the housing recovery.

A standard 30-year fixed-rate home loan hit an average of 4.63% recently before backing off just slightly. That's up from 3.49% on May 3rd and an all-time average low of 3.44% during a week in December.

Regardless of whether the jump in rates reflects a new reality or just volatility in a skittish market, refinance volume is likely to fall further. Home purchases have been on the upswing, but not enough to make up for the decline in refinancing.

Higher rates have an instant effect on family budgets. At 3.5%, a borrower who bought a home for May's median price of $368,000 would have a principal-and-interest payment of $1,322, assuming a 20% down payment. At 4.5%, that payment rises to $1,492.

At 6%, still a decent rate by historical standards, the payment goes up to $1,765.

Despite the run-up in rates, homes remain affordable in most markets across the nation with prices still about 25% off their peak during the housing bubble.

Higher mortgage rates tend to have the immediate effect of pricing certain stretched borrowers out of the market. But it will likely take rates rising to 6% over the next 12 months to depress home purchases and prices.

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Bad At Math? You're More Likely To Lose Your Home

According to a study released last week, math-challenged borrowers were five times more likely to default on their loans.

The study examined several hundred borrowers who held mortgages issued in 2006 and 2007 — right before the mortgage meltdown. Of the study subjects, 25% of the borrowers who scored in the lowest bracket for math skills had defaulted on mortgage payments within five years of getting the loans. Meanwhile, only 5% of those in the top tier for math skills defaulted.

The survey sample included homebuyers from a variety of backgrounds, from blue collar workers to corporate professionals. Their math ability covered the gamut — from those with very limited abilities to a mathematician with a six-figure salary.

The researchers controlled for differences in overall intelligence by measuring for verbal and general IQs, as well as math skills, and controlled for socioeconomic factors, such as age, sex, income, ethnicity and local labor market conditions.

Surprisingly, it did not seem to matter what kind of mortgage the borrowers had, the researchers found.

The researchers asked the survey participants a series of five basic questions. The simplest question asked them how much a $300 sofa would cost at a half-price sale. The most difficult asked how much a savings account of $200 would grow to after earning 10% interest for two years.

Determining why those with poor math skills default on mortgages more often than others will take more research, but previous studies suggest that people who struggle with simple math also struggle with handling their finances. This group tends to budget less carefully, misuse credit cards and mishandle financial emergencies, such as temporary income losses. When they hit a rough financial patch, they may not understand the math well enough to negotiate the most favorable settlements with lenders.

The report suggested that benefits could come from improved financial education. The more homeowners understand money matters, the less likely they are to mishandle them.