Over the last week or so, mortgage interest rates decline by approximately ½%. The net effect will allow a prospective buyer to qualify for a larger loan amount and keep the payment the same or lower the monthly payment.
For example, if a home was purchased for $325,000 at a 4.25% interest rate and a 20% down payment on a conventional loan; the loan amount would be $260,000 and the monthly principal and interest payments (PI) would be $1279. An interest rate of 3.75% would allow a home buyer to purchase a home for $345,000 ($20K more), for the same monthly PI payment.
Or if a home buyer purchased the same home at $325,000 and 3.75% interest, the monthly PI would be $1204 which is $75 less per month and a $900 savings per year.
For any potential home buyer who believes that prices will soften, it’s important to also consider the effects of changes in interest rates. As shown above, if rates go back up to 4.25%, but home prices dropped by say $10,000, a buyer is worse off than had he/she purchased at the higher price and lower interest rate. Under this example, prices would need to drop by $20,000 before there was a break even between the higher price and lower rate.
There is a “mass psyche” that I see with buyers and sellers in general. Last year buyers were buying anything they could get their hands on and were willing to pay above asking price and appraised value. At the same time, sellers were holding off listing with the belief that prices would continue to rise in the short run.
The current market has more inventory and some sellers may now regret not putting their homes on the market in Spring 2013. I see the “mass psyche” of many buyers is to sit and wait. They wait because there is a lot to choose from and so are waiting for the perfect home to come along. There has not been recent press about the possibility of interest rates increasing so some buyers do not feel a sense of urgency since they believe rates will stay low. Some potential home buyers believe prices are going to go down. Many buyers try to “time” the market and purchase when they believe prices are lowest. We are also entering, what is typically, a slow selling season with holidays coming up which may be a benefit to buyers over the next few weeks/months. However, what was typical in the past doesn’t seem to apply in today’s environment.
Unfortunately, there is no way to know where prices or interests rates are going or how quickly it will all change, but it’s important that prospective buyers have this information for consideration. This may be a pivotal point and opportunity in the market for home buyers. And most opportunities usually only become evident after they are gone.