Blog post 3/9/2018
In a real estate transaction, lots of variables go into housing affordability. Things like market supply, the availability of land to develop, property condition, and more all effect housing prices.
One of the biggest items that impact affordability (and least controllable) is interest rates.
While rates remain historically low, they have risen in the past year, and all indications are that rates will continue to rise through the end of 2018 and into 2019.
Let’s take a quick look at the impact of interest rates on your ability to purchase. In this example, I will look at the purchasing power for a buyer with a monthly budget for housing of $1000 (principal and interest- does not include escrows for taxes and insurance). To keep it simple, I’ll round off the numbers.
Last year, a buyer with good credit could obtain a conventional loan at in interest rate as low as 3.65%. At that interest rate, the buyer could borrow about $219,000.
This week, lenders updated their rate sheets, and interest rates for the same conventional loan had moved up to 4.85%. That same buyer can now only borrow $190,000.
Most economists predict that rates could move up another point by years end or early next year to 5.85%. That takes our buyer’s borrowing ability down to $170,000.
THAT’S A WHOPPING 32% DECREASE in purchasing power for an average borrower. In our area, that means giving up square footage, maybe losing a bedroom, a third garage, or even a pool.
It’s worth saying that even a 5.85% interest rate is still a very favorable interest rate. Historically the lowest interest rates were 3.31% in 2012, and the highest rates were an incredible 18.63% in 1981! What did your buying power look like with a nearly 19% rate- you could only borrow $64,500! Maybe those weren’t the good old days!
In conclusion, if you have been putting off selling or buying, you may want to take into consideration the climbing interest rates. Higher rates will limit the buyer pool for your home, and limit your buying power when you purchase.
BUY NOW, OR BUY LESS! As always, the experts at The Erhardt Group are here to help you with all your real estate needs.