Home Prices Vs Interest Rates

Dated: 09/11/2013

Views: 471

Should you wait for interest rates to go down if prices are going up?
It hurts my head to think about it, but I'll give it a shot.Whether sales price is more important than the interest rate depends on your perspective. All real estate is local. This means whatever is happening in your local market in NOVA, for example, could vary wildly from, say, the market in Manhattan. It's pretty much impossible to time the real estate market, but you can take advantage of the way the market moves. Let's look at historical interest rates for a 30-year fixed-rate mortgage. Generally, when interest rates go up, sales prices go down.

Rising Sales Prices vs. Declining Interest Rates

Say you are comparing a home in Reston that was worth $500,000 and your interest rate is 4.5%. If you were buying in a declining market and waited until that price fell to 450,000 but rates went up to 6.5%, you might be better off buying at the higher price. A payment on an 80% LTV mortgage for a $500,000 home at 4.5% is $2026.74. A payment on an 80% LTV mortgage for a $450,000 home at 6.5% is $2275.44.Put another way, if you paid $50,000 more for the home by paying $500,000 and lived in that home for 30 years, by the time you paid off your loan, you would have paid a total of $729.626.If you paid $50,000 less by paying $400,000 but paid on the higher interest rate for 30 years, by the time you paid off your loan, you would have paid a total of $819.158.

How Much Do You Lose in Sales Price With Each .50% Interest Rate Hike?

Let's now compare that home at $500,000 if rates went up 1% point and you wanted to keep your payment about the same. How much home could you buy?
  • $500,000 x 80% at 4.5% interest equals a payment of $2026.74
  • $450,000 X 80% at 5.5% interest equals a payment of $2044.04
You can see that a 1% increase in an interest rate would lose you about $50,000 of purchasing power in this price range. If you doubled the sales price, you would lose about 100,000 of purchasing power for a 1% spread in interest.This is why interest rates play a huge factor for many home buyers. If you are stretched too close to the top end of your price point and rates go up, you might not be able to buy that dream home you want because you will no longer qualify for that sales price.

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