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Market News and Trends, The Business of Real Estate

Mortgage Rates, Payments, and Buying Power


Planning to buy a home?  Missed the tax incentives over the past couple of years but counting on low interest rates to help?  If you’re waiting for a better time to buy, at least in the Austin/Central Texas real estate market, don’t wait too long.  As I have written for many months, the Austin area never felt the housing downturn in the way the national news has described it.  Despite some inventory build-up in recent months, values remain stable in most areas and it is entirely reasonable to expect that prices will be creeping upward during 2011.

More importantly, mortgage interest rates are on the move.  Many of us have predicted for a long time that rates could not stay as low as they did as long as they did, and in historical terms today’s average of about 4.75% is still incredibly low.  Nonetheless, just a few weeks ago I saw 30-year mortgages quoted very near 4%.  They have risen steadily since then and most observers believe that this time the run-up will continue. 

What does that mean to you?  The short answer:  higher monthly payments and reduced buying power.  See the table below:

Current A B C D
Sale Price $200,000 $200,000 $200,000 $200,000 $200,000
Interest Rate 4.00% 4.50% 5.00% 5.50% 6.00%
Loan Type/Term FHA/30 Years FHA/30 Years FHA/30 Years FHA/30 Years FHA/30 Years
           
Down Payment % 3.50% 3.50% 3.50% 3.50% 3.50%
Down Payment $ $7,000 $7,000 $7,000 $7,000 $7,000
Loan Amount $193,000 $193,000 $193,000 $193,000 $193,000
           
MonthlyPrincipal & Interest $954.83 $1,013.37 $1,073.64 $1,135.58 $1,199.10
Diff. vs. 4.00%   $58.54 $118.81 $180.75 $244.27
           
Equal Payment

Buying Power
$200,000 $187,738 $176,572 $166,386 $157,079
Diff. vs. 4.00%   ($12,262) ($23,428) ($33,614) ($42,921)
           
NOTE:  Total monthly payment will include property taxes, hazard insurance, and monthly FHA mortgage insurance premium.  Results calculated here include only monthly principal and interest payments.

What that chart assumes you’re planning to buy a home using a 30-year FHA mortgage loan, making the minimum 3.5% down payment.  If your income and financial condition would have qualified you for a $200,000 purchase at an interest rate of 4%, you have already lost more than $12,000 in buying power.  If you wait until rates rise to 6%, you will have lost almost $43,000 in buying power — at that increased interest rate you will only be able to buy about 80% of the property value that you qualified for a few weeks ago!

For sellers:  This change in the market is important to you — directly reducing the pool of prospective buyers for your properties.  Given all the other uncertainties in today’s real estate market, now is not the time to “assume the best.”  If you are planning to wait until Spring to market your home, or to temporarily withdraw your listing until the “traditional” selling season, my advice is to avoid that temptation.  You need to be part of the market activity now and throughout the Winter.  I believe the 2011 will be a relatively strong year in Central Texas real estate, but if you want or need to sell in the next six to twelve months you need to be part of this process now.

Call or text or email me if you have any questions, or if you want a copy of the MS Excel worksheet that became the table in this post.

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About Bill Morris, Realtor

More than thirty years of business experience (high tech, client service, business organization and start-up, including many years in real estate) tell me that service is the key to success and I look forward to serving you. I represent both buyers and sellers throughout the Austin metropolitan area, which means first-hand market knowledge is brought to bear on serving your needs: -- Seller Representation is a comprehensive process that begins with thorough market analysis and consultation, continues with properly staging the home to achieve the highest price possible in a reasonable time on market, a complete program of marketing and promotion, ongoing updates and communication, closing coordination, and follow-up throughout (and after) the sale. -- Buyer Representation is also full service: shopping, previewing, price and market consultation, contracting, negotiating, coordination of inspections, appraisals, repairs, and closing details, and follow-up beyond the closing of your purchase to ensure your lasting satisfaction. Because the real estate industry is becoming more sophisticated and challenging every day, you need a professional that understands the industry and is positioned to stay ahead of the game. I go the extra mile to help you achieve your goals. That's why I constantly research the market and property values so your home is priced effectively from day one. I also make sure the public knows your home is for sale by using innovative advertising and marketing techniques to attract potential buyers.

Discussion

3 thoughts on “Mortgage Rates, Payments, and Buying Power

  1. If rates rise, won’t prices fall? They’ll have to as the purchasing power of all buyers drops as rates rise? So, is there any hurry to buy?

    Posted by Mr. Bubble | December 16, 2010, 11:03 PM
    • You’re right that this will create downward pressure on prices, but buying power will likely fall faster than sellers will recognize the change. At the same time we have continuing job creation and in-migration in Austin and Central Texas, the strongest beginning in the U.S. of a recovery from the recession, and a shortage of lots that will retard rapid creation of new home inventories to compete with resales. Interest rate changes will probably slow down value appreciation somewhat, but buyers who wait six months, I believe, will find both prices and rates up.

      Posted by billmorrisrealtor | December 17, 2010, 12:06 AM

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