For years I have explained to people that housing prices and the run-up that ensued functioned similarly to the bond market. How so? For simplicity sake lets say a historically a competitive interest rate has been in the 10% range. If rates drop to 5% this essentially doubles your purchasing power. Add in fundamentally unsound loan products, ridiculously low teaser rates, and this fueled appreciation in the housing market. A person able to afford a 200K home in 2000 could now afford a 400K+ home.
Today we have seen a price correction in some places of up to 50%. Interest rates are hovering in the 5% range, which creates a very interesting situation. 5% is historically low and most believe that the days of this rate are numbered. Knowing that 5% is historically low I did a quick calculation to see the impact of interest rates relative to housing prices.
Loan Term Rate Pmt
100K 30yr 5% $537
90k 30yr 6% $540
When interest rates rise 1%, this will offset a 10% further decline in housing prices. This 1 pt. increase is actually a 20% increase in rates.
It would be easy to make the argument that an increase in rates will cause another leg down in the market. However, in resilient markets such as the Bay Area I believe there is greater risk of interest rates affecting affordability and so long as you are planning to be here for the long term the data suggests that this is an extraordinary time to buy and have an affordable monthly payment.
As always, do your due diligence. There are a lot of great properties out there!
From the desk of Zach Trailer
by Lanny Berg
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