Low Interest Rates Create More Buying Power

Our current low interest rates are a bright spot in a flat housing market. Low interest rates allow buyers to qualify for a much higher valued home. The current rate on a thirty year fixed rate loan is 4.5%. When that interest rate bumps up just one percent which it surely will at some point in the not too distant future, a home buyer’s buying power will decrease by 12%.  That’s a mathematical fact whether the purchase price is $300,000, $500,000 or $700,000. In other words, the buyer with the same income will no longer be able to purchase a $300,000 home but only one for $264,000.  A $500,000 purchase price gets reduced to $440,000 and a $700,000 purchase to $616,000.

What that means in real house terms is that a buyer may have to reconcile him/herself to a single car garage vs. a double; three bedrooms versus four; one bath versus two; an attached zero lot line home versus a single family and overall reduced square footage.  There’s an old saying in the real estate business that it’s not the price of the home that’s important but the rate of interest on the mortgage.  Because of our consistently low interest rates over the past three years, most buyers have forgotten that adage.  However, if a buyer considers the interest he’ll pay over a thirty year period of time, a difference of one percent can quickly add up to more than a couple hundred thousand dollars.

With historic low interest rates plus a flat or slightly declining overall value of homes in our local market, now could not be a better time to purchase.  Let me go on the record and predict that local home values will not decline 12% over the next year but interest rates will rise, if not next year, surely after the national election of 2012 and thus reduce a buyer’s home buying power.  In other words, home values would have decline 12% in order to compensate for a 1% increase in rates.

It always saddens me when I see a buyer walk away from a home purchase because they can’t come to terms with a seller.  Many times buyers and sellers are quibbling over less than five thousand dollars. Amortize that $5,000 over 30 years coupled with a potential increase in interest rates and a buyer is walking away from a home that they’ve spent hours searching for and which may never be available again in the same location or floor plan for about the cost of 2.5 lattes (venti  with syrup and soy) a month. That $5,000 is much more important to the seller than the purchaser because to the seller it’s dollars today versus amortized dollars.

So if you’re in the home buying market, remember that the interest rate on your mortgage is more important than your purchase price.