Mortgage Rates Up, Home Prices Down: Is What You’re Paying Really Lower?
A very interesting article in the New York Times has been expressing what I’ve been discussing with my husband lately about home buying. Yes, prices are coming down somewhat (at least in Marin; the decline may be more pronounced in your neighborhood). But, with the tightening of credit, mortgage rates have creeped up. While home buyers are paying less for the purchase price of their home, the cost of financing it now is more. So, is the overall net effect just a wash? And if your belief is that home prices still have more to go, is it worth waiting in case mortgage rates keep going up?
So what is the answer? The NYTimes tackled this issue and their conclusion was
“The answer depends on where you live. In some parts of the country where prices may fall much further, it could pay to hold off even if mortgage rates do continue to rise. But in places where houses no longer look so overvalued, like San Francisco, it may be tempting to start testing the waters.”
The article also quoted an employee of a financial research firm saying that the rising rates may even put further downward price pressure, since ultimately, they know the price is less affordable to potential buyers.
Take a look at the case study:
“Take, for instance, a couple who buy a $500,000 home and make a down payment of 20 percent, or $100,000. With a 6.43 percent interest rate on a 30-year fixed loan, their monthly payment would be $2,510. Over the 30-year life of the mortgage, they would pay a total of about $1 million for the home, including the down payment.
But what if that couple had waited and the home price dropped 9 percent to $455,000 but mortgage rates rose to 7.01 percent? Now, the 20 percent down payment would be $91,000, and the monthly payments $2,424. The buyers would end up paying a total of about $964,000 for the house, or nearly 4 percent less. If the buyers were able to refinance to a lower rate a few years later, the total cost could be even lower.
The calculations change, however, when mortgage rates go even higher. Once the rates move above 7.36 percent, they begin to lose the benefits of the 9 percent drop in the house price.”
I did a geeky comparison for myself on Excel and it seemed to me that the % decline in price becomes just about becomes a wash if the mortgage rates increase by the % decline divided by 10. (You’re still a bit ahead by waiting on the decline). See my calculations below for house with a tickt price of $850,000. I tried this with $500,000 and $1 million homes and got the same results.
