In just the past three months, the cost of paying a mortgage has climbed 14%, and a buyer has lost 14% in purchasing power. For example, a buyer who was approved at $500k at the beginning of May 2013 can now only afford $430k as mortgage rates have surged from 3.25% at the beginning of May to 4.75% this week.
In the past year, there has been on average a 10% increase in housing values across California, and the average rate was 3.5% over the past year versus 4.5% over the past few weeks (*rates are 4.625% this morning).There is a good chance that this time next year, we might be comparing a rate of 4.5% versus 5.5% if rates continue to increase.
On the positive side, homes have been appreciating nicely over the past 18 months. In fact, many housing experts are predicting 10%-15% appreciation gains or more on top of the gains we have seen, over the next 3 years alone. With the Tahoe market beginning to see multiple offers across all areas of our market, there is no doubt we are on our way. But when rates increase by just 1%, a buyer loses 10.75% in purchasing power or affordability. So if rates continue to increase just 1% from where they are today, a buyer’s purchasing power drops. It’s important that buyers understand that rising rates will continue to erode affordability.
Even though the recent surge in rates has been tough to watch, it is important that buyers today understand and appreciate where current rates are in relation to historical averages. Because the good news is mortgage rates are still at 40 year lows. Take a look at this chart.
As you can see, the average 30 year fixed mortgage rate over the past 40 years is roughly 8.7%, and 6.5% over the past decade! So for any buyers who are still on the fence looking at buying a home, getting a rate around 4.75% is still a terrific rate.
What is really important for buyers to understand right now is to focus on their monthly payment and not the rate. Yes rates have gone up and it is very unfortunate, but is the monthly payment still affordable? If the payment is still affordable, do not focus on the interest rate.
Overall, it is still a great time to buy a home right now. Waiting another 6 months or a year to buy will probably end up costing a buyer more money, as home prices will probably continue to rise due to low inventory and high demand for homes. And rates will probably continue to rise , as the Fed announced recently they will begin to taper back their bond purchases later this year, which have been artificially suppressing interest rates over the past several years.