Lower Rates, Yes, But Higher Prices (& Fewer Choices)
First, a caveat: to home Sellers, higher home prices are an unalloyed plus.
More money at closing is . . . more money (Realtors paid commissions like it, too).
And lower interest rates are catnip to Buyers — at least ones financing their purchase.
But at what point do rising home prices — occurring now in most markets nationally — offset (or worse) the benefit of cheaper money?
Half-full or Half-empty?
Some concrete numbers illustrate the issue.
Re-wind the clock a few years, to when interest rates were closer to historic levels, and assume the following numbers:
Home sale price: $425k
Downpayment: 10%
Mortgage: $382,500
Interest rate (30-year fixed): 5%
Monthly payment (Principal & interest): about $2,000 a month
Now, let’s revisit the same house after interest rates have collapsed to 3.5%.
How much can the Buyer afford to pay and still have the same $2,000 monthly payment?
Answer: $500k.
Surprise, surprise, it sure looks like (at least to me) that a lot of homes that would have fetched $425k a few years ago are now selling for . . . around $500k.
Except that now, thanks to reduced inventory, Buyers have fewer choices, and as a result more of those homes are selling in multiple offers.
Now do you get what Ben Bernanke’s detractors (I’m one of them) are carping about??
Other Factors
Of course, at higher prices, Buyers have to come up with more money for a downpayment as well (and will have higher insurance premiums on the more “valuable” home).
In the example above, the difference between putting 10% down on a $425k purchase vs. 10% on $500k is $7,500.
Somewhat offsetting that: 1) more Buyers today are asking for (and getting) points from Sellers to finance their closing costs (in essence, they’re borrowing them at today’s ultra-low rates); and 2) Buyers who itemize their deductions pay lower taxes on their bigger mortgages.
P.S.: You’d certainly think that another feature of today’s housing market relative to the peak would be lower property taxes.
While tax assessed values have certainly dropped, rising mill rates have more than made up for that, leaving most homeowners no better off.
