Housing affordability was at an all-time low two years ago, but has improved since then. How did that happen? The rise in home prices slowed down, wages have continued to go up, and lower interest rates allowed for lower payments. These three factors together have brought homeownership dreams closer to reality for millions of aspiring homeowners, but most don’t know it.
Let’s look at just how much of a difference this makes in housing affordability.
How Much Have Interest Rates Changed?
The Freddie Mac Mortgage Market Survey is a report published every week that takes a look back at the actual interest rates borrowers locked at the previous week. In other words, these are not interest rates used as click-bait to gather your data, but actual interest rates that actual borrowers got when they locked their loans in process, across the nation.
This survey measures only loans that will be sold to Freddie Mac, so they are conforming loans made to qualified borrowers. Interest rates are dependent on many factors, and the rate you are offered by a lender could be very different. However, by looking at rates over time we can see the general trend in interest rates, and how that affects your borrowing ability.
At this time last year, the average rate across the country for a 30-year, fixed-rate mortgage was 4.75%.
This year in the same time period (the first week of December), the average interest rate across the country was 3.68% for the same mortgage.
Lower Interest Rates Make Homes More Affordable
Let’s take a typical Silicon Valley scenario, and see how this would impact your borrowing power and affordability. We will assume a purchase price of $850,000, because at that price you could put 10% down and still get a conforming loan. Let’s also assume that you are a qualified borrower – meaning you have reasonably good credit, verifiable income, and enough cash on hand for the down payment, closing costs, and reserves.
We will compare the monthly and total cost of this purchase at last year’s interest rate of 4.75% with today’s lower interest rates of 3.68%. Here’s how they compare:
You’ll notice several ways in which the lower interest rates makes a dramatic difference in the cost of owning this home:
- Your monthly mortgage payment is $478.09 less
- You will have made $40,159 less in monthly payments over 7 years
- Even so, you are paying your mortgage down faster. Over 7 years you have paid $15,883 more in principal with the lower interest rate
- Your total interest cost over 7 years is $56,042 less with the lower interest rate. (Obviously, the longer you keep your home, the larger this number grows.)
This Means More Borrowing Power, Too
Let’s look at this another way. At current interest rates your payment for this purchase would be $3,512.52. How much home could you afford if you needed to keep your monthly mortgage payment at $3,512.52 but your interest rate was 4.750%?
It turns out that a purchase price of $748,168 with 10% down and an interest rate of 4.750% would yield a monthly mortgage payment of $3,512.52.
In other words, the drop to lower interest rates over the last year has increased your borrowing power by about $100,000.
Lower Interest Rates Support Higher Values
Most home buyers think of the cost of a home purchase as two distinct “buckets” – the down payment, and the monthly payment. While the higher purchase price requires a larger down payment, you can see why the monthly payment actually makes a more substantial difference to the average home buyer.
The steep rise in housing prices has slowed down for now due to eroding consumer confidence and wages that are rising a little too slowly, but lower interest rates have prevented them from correcting. That trend seems likely to continue. Will housing prices fall anytime soon? No one know for sure, and of course they could. It’s just as hard to time the real estate market and the interest rate market as it is to time the stock market. What we know for sure is that appreciation has slowed down, multiple offers and bidding wars are less common, and interest rates are very close to historic lows.
Even if you think you might not be ready to seriously shop for a home, now is a very good time to meet with a competent mortgage advisor and Realtor to see what you need to do to qualify for a home when the opportunity to buy your dream home arises.
This article represents the opinions of Casey Fleming, and not necessarily those of C2 Financial Corp. This analysis was prepared with the best information available at the time it was written. Neither Casey Fleming, nor C2 Financial Corp., have any magical insider information about bond markets, real estate markets or mortgage markets that would make economic projections any more reliable than any other source. No warranty is made that the outcome will reflect the projections in this article, and neither Casey Fleming nor C2 Financial Corp. are responsible for decisions that you make regarding your own choices about your real estate or mortgage or those of your clients.
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