The Buying Power of 1%
Updated: Nov 13, 2020
All-time low interest rates are driving demand across all generations. Strong demand created by dropping rates has countered other economic disruptions (e.g., pandemic, recession, record unemployment).
Freddie Mac just forecasted mortgage rates to remain low through next year:
“One of the main drivers of the strong housing recovery is historically low mortgage interest rates…Given weakness in the broader economy, the Federal Reserve’s signal that its policy rate will remain low until inflation picks up, and no signs of inflation, we forecast mortgage rates to remain flat over the next year. From the third quarter of 2020 through the end of 2021, we forecast mortgage rates to remain unchanged at 3%.”
With rates so low, it's easy to take for granted the dramatic impact interest rates have in affordability. The rule of thumb we share with our clients is for every 1 % increase in interest rates, the amount of house you can afford decreases 10%. For example, let's look at a buyer with a payment budget of $3,000 per month. Here's how much house they can finance based on the interest rate depending on the interest rate.
3% - $710,000
4% - $625,000
5% - $560,000
6% - $500,000
7% - $450,000
So when our financing clients ask us if it's the right time to buy given the high housing prices and low inventory, we typically answer yes. Locking in a great interest rate and getting more house for your money is better than trying to time the real estate market, only to find that interest rates are back to 6% and you can now only afford 30% less house.