How Rising Interest Rates Will Impact Affordability

| March 6, 2012 | 0 Comments

For those who can afford to buy, trade up, or invest, our current market presents a lifetime opportunity. Reposted from KWblog.

In a recent Forbes blog post, multimillionaire hedge fund manager John Paulson declared that today’s record-low interest rates made this the best time to buy homes in fifty years. “If you don’t own a home, buy one,” Paulson said. “If you own one home, buy another one, and if you own two homes, buy a third and lend your relatives the money to buy a home.” Why should we care what Paulson thinks? Well, he was among the few to accurately predict the subprime collapse and, while no one has a crystal ball, a closer look at the numbers supports his call to action.

Historically low interest rates are the key…and they aren’t likely to hang around for long.

As we wrote in SHIFT, buyers who “choose to wait until prices come down more” are gambling that interest rates will hold steady or drop. The truth is even a 10 percent drop in home prices is nullified by a 1 percent increase in interest rates. The figure below illustrates how this works for a $250,000 home purchase and the relative likelihood of each scenario.

To figure out which was a smarter bet–counting on home prices to fall further or interest rates to rise–our research department took the last ten years of monthly home price and mortgage interest rate data and ran the numbers to see which was more likely: an increase in mortgage rates or a further drop in home prices. Here’s what we found:

  1. A one percent increase in mortgage rates is ten times more likely to happen than a ten percent drop in home prices.
  2. A one percent rate increase more than offsets a ten percent reduction in home prices.
  3. When interest rates fall by one percent, the total interest paid is almost three times more than the interest savings from a ten percent drop in home prices.
  4. The probability of both happening at the same time is ridiculously small, and homeowners would still pay 15 percent more in interest over the life of the loan.

Interest rates have dominated the news in recent months as we’ve shattered record low after record low. Potential home buyers need to understand the positive financial impact low interest rates have on the cost of home ownership and the thousands of dollars that can be saved over the life of a typical mortgage loan. For those who can afford to buy, trade up, or invest, our current market presents a lifetime opportunity.

Category: Words Of Wisdom

About the Author ()

Mark Olesh, Regional Director - In the last 5 years, Mark has led the South Florida Region to Top 5 finishes in growing his team 3 times (including #3 in 2009, #2 in 2012, and #4 in 2013). In that same time span as Regional Director, total agent commissions have increased by $84 million. The Region has 28 market centers and over 5,000 agents. Mark began as a capping agent in Palm Harbor, became an ALC member and was then recruited into the Team Leader opportunity. There, under his leadership, the office grew from 95 to 210 agents and had sales of over $220 Million. Mark also enjoyed coaching many of the top agents in the market center as well. Mark is passionate about the Keller Williams opportunity and using it to help you build wealth in multiple areas. Contact Mark today for a confidential career consultation. 727-772-5600 x23 Olesh@kw.com

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