While Interest Rates are Low: A Good Time to Buy and a Good Time to Sell

By: Victor Normand
Published: October 2012

*

FHA Minimum

Interest Rate

3.75%

4.75%

6.60%

Term (years)

30

30

30

Purchase Price

1

 $      590,000  $  523,800  $  427,900

Downpayment

 $        20,650  $    18,333  $    14,977

Loan Amount

 $      569,350  $  505,467  $  412,924

 Mortgage Payment

 $           2,637  $      2,637  $      2,637

New Qualified Price

 $    66,200  $  162,100

Number Homes now Excluded

-9

-17

Percent of Homes on the Market

-12.5%

-23.7%

1

Current average list price in Acton

 

While Interest Rates are Low: A Good Time to Buy and a Good Time to Sell

 

The link between mortgage interest rates and purchasing power is well known but it doesn’t hurt to remind ourselves of the impact by seeing the numbers in print.  The chart below uses the current 30 year mortgage rate (3.75%); a rate one point higher (4.75%); and the historic long term average rate (6.6%) to demonstrate the financial impact of changing rates.  The monthly mortgage payment ($2,637) is held constant and assumes that this is the maximum monthly payment a borrower has been qualified for.

The change is dramatic.  A rule of thumb is that every one point change in rates translates into about a $60,000 change in borrowing capacity.  So, whether you are shopping for value or looking to maximize your borrowing capacity, it could not be a better time to buy particularly since rates don’t have much lower to go, and everyone believes they will surely go higher, never to return to these levels in our lifetime.

But what should potential Sellers do about these rates?  Clearly, if low rates produce more Buyers, that has to be good for Sellers.  Remember economics 101, increased demand leads to increased prices.  But what are the consequences for Sellers of waiting for prices to increase?  Not much, if you believe that nothing else will change in the economy.  And, as we have already said, the prospect for increased interest rates is great.  While rising interest rates do not usually cause home prices to decline, they will cause Buyers to lower their sites and look for less costly homes on the market, since the value of pre-qualification statements is directly tied to interest rates.

In the current Acton Housing market where 72 properties are listed for sale, our theoretical Buyer qualified for a mortgage at $2,637.  If rates went one point higher this Buyer would have 9 fewer properties that she could afford; and if the rate went back to the historic average rate of 6.6%, then 17 properties would be closed off to her.

So essentially, every time the rates go up, every Buyer group drops down a bit, sort of like musical chairs where most are still able to find a seat, but one participant always gets left out every time the music stops.  In this case, the participants getting left out are higher priced homes.

So, if you are thinking of selling your home, consider the impact of rising interest rates and contact a Resident Expertsm soon and develop a good selling strategy for yourself.