Booster Shot for Housing Market
“10-Year Treasury Yield Falls Below 2%, Defying Expectations.”
—Wall Street Journal headline (6/20/19).
Thanks to diving interest rates, the housing market is getting a booster shot entering a time of year (mid-Summer) when things customarily start to slow down a bit.
How dramatically have rates fallen?
In just six weeks, 30-year mortgages have dropped almost 75 basis points, from close to 4.5% to 3.75% — and may be headed even lower.
Purchasing Power Boost
That drop may not sound like much, but it translates into a surprisingly hefty pop in Buyers’ purchasing power.
That’s because home buyers typically use borrowed money — called a “mortgage” — to finance most of their purchase.
So, with rates at 4.5%, a prospective home buyer looking for a $400k home with 20% down (= $320k mortgage) could expect to pay just over $1,600/monthly in principal and interest on a 30 year mortgage.
By contrast, if rates drop to 3.5%, that same $1,600 payment now supports a $360k(!) mortgage.
That means the $400k buyer now can afford a $440k home.
The only catch for Buyers?
Their competition benefits from the same financial windfall, increasing demand for homes.
That, of course, ultimately benefits Sellers (sorry, Buyers) . . .
