Interest rates are now above 6.3 percent for 30-year financing -- a terrific rate for much of the past half century but a full percentage point above the fixed-rate mortgage levels seen in 2003.

Higher interest rates mean two things: First, they limit the ability of borrowers to bid more. Second, they limit the number of bidders at any given price point. A $200,000 fixed-rate loan at 5.3 percent costs $1,110.61 per month for principal and interest over 30-years. At 6.3 percent and the same monthly payment, the borrower can only finance $179,428.

Not only have rates increased in 2005, there is reason to believe they will increase further.

The recent hike in energy prices, as one example, is nothing more than a universal tax on every transaction, product and service. It effectively raises costs that people, governments and businesses will try to re-capture through higher prices, taxes, wages and interest levels. Higher energy prices also directly increase the cost of homeownership.

What does it all mean? Look for a gradual and growing preference toward smaller, energy-efficient properties which cost less to buy and less to operate. With smaller appreciation, watch for reduced speculation which in turn will further shrink demand. Finally, look for savvy borrowers to limit future costs by refinancing now with fixed-rate mortgages -- before rates go still-higher.

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