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 buyerâ€™s buying power will decrease by 12%.Â Thatâ€™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.Â 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.Â Thereâ€™s an old saying in the real estate business that itâ€™s not the price of the home thatâ€™s important but the rate of interest on the mortgage.Â Because of our consistently low interest rates over the past three years, most buyers have forgotten that adage.Â However, if a buyer considers the interest heâ€™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.Â 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 buyerâ€™s home buying power. Â 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 canâ€™t come to terms with a seller.Â 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 theyâ€™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 Â with syrup and soy) a month. That $5,000 is much more important to the seller than the purchaser because to the seller itâ€™s dollars today versus amortized dollars.
So if youâ€™re in the home buying market, remember that the interest rate on your mortgage is more important than your purchase price.