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There is a lot of discussion about the interest rates being raised by the feds and how it will affect home affordability. This increase in rates is truly a great discussions to have, but interest rates are only half the equation when it comes to being able to afford a home. The other half of the equation of course is price. Over the past 8 years housing prices have had more to do with the affordability of a house than rates by a wide margin. Below is an example of why impending house price increases may be more important than the Fed raising interest rates:
Let’s assume a home today is priced at $250,000 at today’s 30 year fixed rate of 3.75%. The P&I Payment with 20% down would be $926.23/month.
Using the Affordability Index formula a borrower would need an income of $44,450/year to qualify not including other expenses.
If the rate increased to 4% the P&I would increase to $954.83/month and the required income would increase to $45, 830/year or an increase of $1,380/year.
On the other hand if the $250,000 price increased 5% to $262,500 and the rate remained 3.75% the new P&I would be $972.54/month.
The higher price would now require an income of $46,680 or an increase of $2,230/year from the original price not including other expenses. That is an additional $850/year over that caused by the ¼% rate increase.
We can also look at this from the property tax point of view. With each increase in home value, the taxes you pay will increase, reducing your buying power.
With so little new construction and recent increases in Existing Home Sales, inventories are dropping and there are already many areas seeing 5% appreciation or even more. While not terribly important for rates they may indicate the need for a greater sense of urgency on the part of future home owners than any fear of rate increases.
Let’s assume a home today is priced at $250,000 at today’s 30 year fixed rate of 3.75%. The P&I Payment with 20% down would be $926.23/month.
Using the Affordability Index formula a borrower would need an income of $44,450/year to qualify not including other expenses.
If the rate increased to 4% the P&I would increase to $954.83/month and the required income would increase to $45, 830/year or an increase of $1,380/year.
On the other hand if the $250,000 price increased 5% to $262,500 and the rate remained 3.75% the new P&I would be $972.54/month.
The higher price would now require an income of $46,680 or an increase of $2,230/year from the original price not including other expenses. That is an additional $850/year over that caused by the ¼% rate increase.
We can also look at this from the property tax point of view. With each increase in home value, the taxes you pay will increase, reducing your buying power.
With so little new construction and recent increases in Existing Home Sales, inventories are dropping and there are already many areas seeing 5% appreciation or even more. While not terribly important for rates they may indicate the need for a greater sense of urgency on the part of future home owners than any fear of rate increases.
