Did you know that buyers lose 10% in purchasing power when interest rates increase by just 1%? With rates jumping from between 4.375% and 5% in just over the past few months, it might be fair to say that we may have hit bottom in the housing market when factoring in what the overall cost is to buy a home. As rising interest rates will eat away any savings buyers could get from waiting for prices to dip again, eventually a buyer needs to make a decision about what is most important to them, either it is their monthly payment or “finding the bottom of the market in terms of price”.
The Impact of rising rates on affordability
Here is a great chart below to share with buyers that shows as rates go up a buyer loses purchasing power. As you can see, with every 1% increase in rates, the buyer loses 10% in affordability. Let’s say someone was shopping in the $400k range but rates increased suddenly by 1%, unfortunately that same buyer will now only afford a $360k price range to keep the same monthly mortgage payment.
The impact of rising rates on buyers approvals
Unfortunately when rates start rising again, this is going to affect a buyer’s purchasing power and monthly mortgage budget. So it is going to be very important that buyers know if they can still qualify and can afford higher rates in their budget. For example, a pre approval that the buyer has had for 3-6 months putting in offers at 4.5% that stretched their budget, might be unaffordable now because rates are at 5%. For example, on a $400k loan the payment increases $121 a month when the rate jumps from 4.5% to 5%, this is a lot for a family of 4.
Higher rates will also affect any current purchase offers or loan approvals that buyers may have. So for someone that was shopping in the $400k range a month ago and the rate was 4.5%, that same monthly payment will only get a home for $380k now with rates at 5%. Remember also, lenders have been tightening their qualifying ratios recently and are constantly changing their rules too, so double check to make sure any increase in rates/payments do not disqualify a buyer from a certain price range either.
Cost vs price. What is the difference?
Buyers have a tendency to look at just the PRICE of the house instead of the overall COST to buy the home. The cost is actually more important. So what is the difference between cost vs price and why is this so important for a buyer to understand? Cost is what a buyer will pay for a home overall, including financing costs. Price is just the actual price tag the buyer will pay the seller for the home not including any financing costs.
This is why it is so important for buyers to understand that rising rates have a tremendous impact on a buyer’s overall cost and monthly payment. We all know there are some home buyers still standing on the sidelines waiting for the prices of real estate to hit rock bottom. These are the buyers that need to understand cost vs price, once they understand this dynamic, then perhaps they will realize that now is a great time to buy a home and may make the decision to buy a home a lot sooner.
Charting mortgage rates over the past 40 years
Here is a great chart below to share with buyers that will give them a little history lesson on interest rates. The average interest rate over the past 40 years has been 9%! Considering the heightened volatility that exists in the financial markets today, as we have the debt ceiling fiasco in Washington, the continued debt crisis in Europe and now talk of more Federal Stimulus aka Quantitative Easing part 3 from the Feds, buyers are taking a huge gamble in assuming that interest rates will remain this low. Because honestly no one really knows where they will be in 6 months due to the unprecedented circumstances we have in today’s financial markets.
But for anyone still looking at buying a home, you can let them know they can still qualify for the lowest rates in 40 years.
Why now is the best time to buy
Everyone wants the best possible value whenever they purchase anything. When buying real estate, the best value is not determined by price alone. Value is determined by price and overall financing costs. Buyers most take both into consideration when making the decision to purchase a home.
If you know anyone that is considering the purchase of a home but believes that waiting is the prudent thing to do because prices may continue to soften, make sure you keep an eye on interest rates for them and have conversations regarding increasing payments and if these rising payments still fit into their mortgage budget.
Because of low interest rates and low home prices, I believe that there has never been a better time to buy a home than today, because rising interest rates will only continue to eat away any savings they could get from waiting for prices to dip again. If you have any questions about any of the information above or you need help getting any buyers pre approved, please feel free to contact me directly at 858-200-9602. I look forward to chatting soon.