Market Update, October 31, 2024

David and our client, Eve, are featured in this Bloomberg article about the housing market. The piece addresses purchasing power and how, with increasing interest rates, it’s gone down for buyers.

As the cost of borrowing money—the interest rate—goes up, the cost of buying a home increases, too. Buyers who talk to a mortgage lender have intimate knowledge of how rates affect how much they can buy.

It’s crucial for sellers to grasp this concept. Without this understanding, they may inadvertently overprice their homes. So, let’s delve into how interest rates influence buyers’ purchasing power, a key aspect of market dynamics.

Interest rates were about 3.25% just three years ago. As I write this, the national average rate for a 30-year fixed conventional loan is 7.02%, while the average for an FHA loan is 6.54%, and for VA loans, it’s 6.55%.

For many buyers, the monthly payment is a significant consideration when determining their home purchase budget. Even small fluctuations in interest rates can significantly alter this monthly payment. According to the Motley Fool, a mere quarter-point shift in interest rates can alter a borrower’s borrowing capacity by about 3%. Therefore, a 1% increase could reduce a borrower’s borrowing power by a substantial 12%. 

Let’s ignore insurance, HOA costs, mortgage insurance, and other monthly costs and focus on the loan amount.

Buyers looking for a monthly payment of around $3,000 (minus those other expenses) could finance about $415,000 at today’s average rate. If rates went down to 5.5%—the level economists think would really jumpstart the housing market—that same buyer could keep the $3,000 monthly payment and finance $485,000. That’s a big difference!

While high interest rates typically exert downward pressure on prices, sellers don’t always factor this into their pricing decisions. They often look at past sales that occurred before the rate hike and assume they can set similar prices. However, they should price their homes slightly lower than those past sales to account for the higher interest rates.