I was talking with some potential buyers yesterday. They have been sitting on the fence for a couple of years watching the market. With rising home prices and interest rates, they now realize they missed the best time to buy.
While prices and rates are up, they still have more buying power today than at almost any time in history. And rates are only going to go up. They have to go up in order to get the private sector to invest in mortgage back securities.
Let’s take a look at a typical move-up buyer in our market. The couple makes $135,000 per year or $11,250 per month. Let’s also assume that the maximum front-end qualifying ratio is 35% or a $3937.50 monthly payment.
The chart below depicts the amount of buying power this couple has at a number of different interest rates.
As rates climb, the amount of home they can purchase decreases rapidly. A 3 percent increase in interest rate results in a 21 percent reduction in buying power. This assumes that housing prices remain stable. Rising prices over time further dilutes their buying power.
There is still time to take advantage of the historic low rates and relatively low housing prices.
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Photo: Base photo licensed from iStockPhoto
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