price of homes sold since May of 2000. The index was adjusted to reflect a base index value of $100 in May of 2000. The index shows that the average price of homes sold has risen by about 18% over the last 3 years.

The middle line in the chart shows the price of a home that could be afforded as rates have fallen over time, holding the payment constant at the initial May 2000 mortgage payment. The plot shows that using May 2003 mortgage rates, the initial May 2000 mortgage payment funds a purchase price with 20% down of over $147. To actually purchase the new home at $147 the borrower would have to come up with an equity amount in excess of the original $20 down payment of $9.55. Since home prices have increased by $18.13 according to the average home sales price index, the additional down payment (and more) is well within the borrowers reach.

At current mortgage rates, existing homeowners can afford a home at prices well in excess of the average home price. The purchasing power at current rates has created a powerful source of equity and income for homeowners, and a strong ability and incentive for homeowners to refinance their home, or trade up in value. Real estate values and mortgage turnover should be well supported if rates remain at or near current levels. An interesting fact to consider is that up 100 BPs in mortgage rates, the affordable home price drops from $147 to $126.