If you follow the housing market, you’ve been hearing reports over the last year or so about home prices increasing each month. Year to year, home prices are in fact up between five and six percent from June 2013 to June 2014, according to both the Federal Housing Finance Agency (FHFA) and S&P Case-Shiller Home Prices Indices. But don’t let those gains fool you. From a buyer’s perspective, these more expensive homes are just as affordable as they were a year ago. Here’s why.
While the average home is up about 6 percent, which can be a very significant amount of money for higher-priced homes especially, average 30-year mortgage interest rates are down from last year. The last week of June 2013, Freddie Mac reported an average 30-year fixed rate of 4.46 percent. Rates now average 4.10 percent for that same loan type. In other words, any price increases on homes have been mostly offset by the still-declining interest rates.
A Tale of Two Buyers
Take a look at two hypothetical buyers to get a clearer illustration of how things have changed (or not) over the past year in terms of home prices and mortgage rates.
Buyer number one is looking to buy a home in June 2013, specifically, the week of 6/27/13. During that week, he priced a home at $312,500, and planned to put 20 percent down. As such, he was planning to take out a $250k mortgage to finance the remainder, and was able to lock in an interest rate of 4.46 percent. That translates to a $1261 per month payment not including taxes, insurance, or HOA dues.
Fast forward to 2014, to buyer number two. Let’s say the house in the first scenario was not sold. A year later, a new buyer is all set to purchase that home during the week of 8/28/2014 for a price of $331,250. This purchase price difference from buyer one to buyer two reflects the national average home price increase over that period of time.
Buyer two will also be applying a 20 percent down payment, which leaves her with the need to borrow $265k via a home mortgage. Her interest rate, however, is 4.1 percent, which is less than the rate that buyer one was able to secure. This is thanks to the continued decrease in mortgage interest rates over the last year. Therefore, buyer number two’s monthly payment amount would come to $1280, just $19 more than the original intended buyer from 2013.
While the seller was able to get a higher price for his home in 2014, year over year, the same home is just as affordable on a monthly basis for the buyer. Had the interest rate not decreased, the 2014 buyer would have ended up paying $75 more per month.
While the last year did see some upward movement in housing prices, the monthly increases have slowed over the last few months especially. What’s more is that mortgage rates are not expected to stay at their historic lows for much longer. “Bargain basement mortgage rates won’t continue forever; recent improvements in the labor markets and comments from Fed chair Janet Yellen and others hint that interest rates could rise as soon as the first quarter of 2015,” said David M. Blitzer, Chairman of the Index Committee at S&P Dow Jones Indices in a recent press release. “Rising mortgage rates won’t send housing into a tailspin, but will further dampen price gains.”
With all things considered, now could very well be a wise time for buyers to get the most home for their money. Likewise, sellers might want to try to close the deal and sell their homes before buyers face rising interest rates that may affect which homes they can afford.
Take Advantage of Low Rates While they’re Available
Rates are set to rise, so home shoppers could win if they purchase soon. Rising rates could mean a hundred dollars per month or more for buyers.