As recent as a month ago, it was still possible for a home buyer to purchase a home with an interest rate of between 3% and 3.5%. Today, rates are generally floating around 4.5% or higher. In the big picture of housing interest rates, 4.5% is still an excellent rate, but we’ve all been spoiled in recent years and this change does impact the housing market. Let’s take a look at how this rise in interest rates is affecting the purchasing power of potential homebuyers in the marketplace by way of an example.
Let’s say that a buyer is qualified to purchase a home priced up to $400,000, assume that the buyer is putting 10% down and then look at payments under two interest rate scenarios as follows:
Purchase Price: $400,000
10% Downpayment: $ 40,000
90% Loan Amount: $360,000
Monthly Principle & Interest Payments
At an interest rate of 3.5% : $1617
At an interest rate of 4.5%: $1824
Increase in Monthly Payment: $ 207
Assuming that $360,000 was the maximum loan amount that our buyer could qualify for at 3.5% with a payment of $1617, what is the new price that our homebuyer can now afford? The new maximum loan amount based on a payment of $1617 and an interest rate of 4.5% is $319,133. With 10% down, the buyer’s maximum price is now $354,592 or $45,408 less in price.
Is it reasonable to think this will affect demand on the housing market? IT SURE IS! Our homebuyer’s purchasing power just went down by more than 11% with a 1% increase in interest rate. Whatever risk concerns have been in the past about price declines in the market, a 1% increase in rate overshadows to a great deal any decline in market price.
Will prices continue to increase at the rate we seen over the last several months. I’m seeing a change in the market now with prices leveling off through the summer. While it’s reasonable to assume we will see prices continue to rise, I don’t believe we will see the rate of appreciation continue at the fevered pace of the last year. Will interest rates be higher than 4.5% by June of 2014. Who knows? I have talked to several lenders and they are at odds with each other on this point. Any potential buyer or seller should at least be prepared for the potential of higher rates over the next year.
If you are looking to buy a home in today’s market and have been pre-approved on a home loan through a lender, it’s a good idea to huddle back up with that lender to determine if you need to adjust your considerations on price, square footage and potential location.
If you are a homeowner thinking of placing your home on the market, it is important to understand the impact of rising interest rates, buyer’s purchasing power and negative impacts on demand. Bottom line: Price your home appropriately and rely on the advice of a Real Estate Agent you trust who will provide you the facts about pricing and marketing your home.