| John R. Hastings Associate Broker Licensed in Arizona |
Interesting Interest "Rule of Thumb"
| Here's a tidbit most folks probably do not know . . . an easy to remember "Rule of Thumb" that says When mortgage interest rates rise by 1 percentage point buyers lose 10% of their purchasing power. |
Conversely, when interest rates drop by 1 point a buyer gains purchasing power. However, given that today's
mortgage interest rates are the lowest in history I think it is safe to assume that rates are only going to rise in
coming months & years. Certainly anyone who wants to buy a home will benefit by moving forward and
locking in an interest rate near the current low rates instead of waiting for inevitable rate increases.
Case in Point:
If a buyer can comfortably afford a mortgage payment of (about) $1,000 per month, in today's market with a
4.5% loan they can carry a $200,000 mortgage. Assuming a 20% down payment this translates into a
$250,000 home purchase. If one waits until interest rates rise to 6.5% but wants to keep the mortgage
payment roughly the same, the loan amount would drop to $160,000 - so with the same $50,000 down
payment the home purchase price would need to be $210,000 or less. At 8.5% the affordable mortgage
amount plummets to about $130,000. (See highlighted trend on 1st chart below).
How much mortgage can you afford? Only you can determine how much you can realistically afford to spend
each month, but once you know the amount you are comfortable with for basic Principal & Interest payments
see the 2nd chart below to see how large a mortgage you can handle (and don't forget to allow a little more in
your budget to cover taxes and insurance).
Mortgage Interest Rate history, as tracked by Freddie Mac since 1971, seems to indicate that we can
reasonably expect to see rates easily in the 8.0% - 9.0% range again, creating a large negative impact on
potential buyers purchasing power. (See 3rd & 4th charts below).
mortgage interest rates are the lowest in history I think it is safe to assume that rates are only going to rise in
coming months & years. Certainly anyone who wants to buy a home will benefit by moving forward and
locking in an interest rate near the current low rates instead of waiting for inevitable rate increases.
Case in Point:
If a buyer can comfortably afford a mortgage payment of (about) $1,000 per month, in today's market with a
4.5% loan they can carry a $200,000 mortgage. Assuming a 20% down payment this translates into a
$250,000 home purchase. If one waits until interest rates rise to 6.5% but wants to keep the mortgage
payment roughly the same, the loan amount would drop to $160,000 - so with the same $50,000 down
payment the home purchase price would need to be $210,000 or less. At 8.5% the affordable mortgage
amount plummets to about $130,000. (See highlighted trend on 1st chart below).
How much mortgage can you afford? Only you can determine how much you can realistically afford to spend
each month, but once you know the amount you are comfortable with for basic Principal & Interest payments
see the 2nd chart below to see how large a mortgage you can handle (and don't forget to allow a little more in
your budget to cover taxes and insurance).
Mortgage Interest Rate history, as tracked by Freddie Mac since 1971, seems to indicate that we can
reasonably expect to see rates easily in the 8.0% - 9.0% range again, creating a large negative impact on
potential buyers purchasing power. (See 3rd & 4th charts below).
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| Chart 1 |
| Chart 2 |
So . . . What Can One Do? As we have no control over future interest rates nor real estate market values, in
my opinion all we can do is be aware of the facts and base our decisions accordingly:
Buyers - Qualified Buyers who are wondering if prices may continue to decline and are waiting to find the
bottom of the market should ask themselves "Is it likely that real estate values will decline 10% more before
interest rates rise 1 or 2 percentage points?" I personally lack the ability to accurately predict whether
values will rise, decrease or remain flat in the next year or two. However I am confident that while some prices
may slip a little bit more it is unlikely that the slippage will be significant. Prices are currently back down to
approximately the pre-boom levels of 2001, while the mortgage rates are the lowest in history. Looks like the
odds are high that future interest rate increases will more than offset any possible further price declines.
Sellers - Above all else, be realistic. Acknowledge that prices are dictated by Supply & Demand.
Understand that Demand for any product requires it be affordable. Demand for real estate varies greatly in
different price ranges, not so much because buyers really care what the purchase price is but because they
must care about how much their monthly payment will be. The odds of selling your property rise and fall with
the size of the pool of potential buyers. Obviously there are far more buyers who can afford $500 a month than
there are who can afford $1,500 per month. Ask yourselves "How many years will it take for my property to
appreciate 10% in value versus how many months will it be before mortgage interest rates rise 1 or 2
points?" And for most sellers another question becomes "How much will I need to pay for my replacement
home today compared to some time in the future?" All sellers want to get the top dollar when they sell, and
that fact is completely understandable. However, I also have to say that "top dollar" is a relative term,
influenced greatly by time and the ultimate use of the proceeds of a sale.
Click Here to view statistics on current Supply & Demand . . .
my opinion all we can do is be aware of the facts and base our decisions accordingly:
Buyers - Qualified Buyers who are wondering if prices may continue to decline and are waiting to find the
bottom of the market should ask themselves "Is it likely that real estate values will decline 10% more before
interest rates rise 1 or 2 percentage points?" I personally lack the ability to accurately predict whether
values will rise, decrease or remain flat in the next year or two. However I am confident that while some prices
may slip a little bit more it is unlikely that the slippage will be significant. Prices are currently back down to
approximately the pre-boom levels of 2001, while the mortgage rates are the lowest in history. Looks like the
odds are high that future interest rate increases will more than offset any possible further price declines.
Sellers - Above all else, be realistic. Acknowledge that prices are dictated by Supply & Demand.
Understand that Demand for any product requires it be affordable. Demand for real estate varies greatly in
different price ranges, not so much because buyers really care what the purchase price is but because they
must care about how much their monthly payment will be. The odds of selling your property rise and fall with
the size of the pool of potential buyers. Obviously there are far more buyers who can afford $500 a month than
there are who can afford $1,500 per month. Ask yourselves "How many years will it take for my property to
appreciate 10% in value versus how many months will it be before mortgage interest rates rise 1 or 2
points?" And for most sellers another question becomes "How much will I need to pay for my replacement
home today compared to some time in the future?" All sellers want to get the top dollar when they sell, and
that fact is completely understandable. However, I also have to say that "top dollar" is a relative term,
influenced greatly by time and the ultimate use of the proceeds of a sale.
Click Here to view statistics on current Supply & Demand . . .
| Chart 3 |
| Chart 4 |