When a buyer asks me if they should hold off purchasing a home and wait for lower sales prices I am quick to point out the loss of purchasing power as mortgage interest rates increase.
Sales Price versus Interest Rate
With the U.S. economy doing well, unemployment at historical lows and a recent tax cut put in place, mortgage interest rates are off their lows and are expected to increase further.
Any buyers thinking of not purchasing a home right now because they want to wait for sales prices to come down need to consider how an increase in the interest rate will erode their purchasing power.
How Much Do You Lose in Sales Price With Each .50% Interest Rate Increase?
Let’s compare a home at $975,000 if rates went up 1/2 point and you wanted to keep your payments the same. The amortization of most mortgages is for 30 years.
If your down payment is 20% of the sales price, how much could you buy to keep your payment around $3,500?
·$975,000 X 80% at 3.5% interest equals a payment of $3,503
·$920,000 X 80% at 4.0% interest equals a payment of $3,514
·$865,000 X 80% at 4.5% interest equals a payment of $3,506
·$815,000 X 80% at 5.0% interest equals a payment of $3,500
·$775,000 X 80% at 5.5% interest equals a payment of $3,520
You can see that a 2% increase in the interest rate would lose you about $200,000 of purchasing power in this price range. If you doubled the sale price, you would lose about $400,000 of purchasing power for a 2% spread in interest.
The cost of the financing far outweighs the cost of the sales price of a home when determining the total cost of buying a home.
I hope you can use this information in a discussion with any potential buyers you meet that are considering waiting for lower sales prices.