In an article today (October 9, 2013) in the National Association of REALTORS® (NAR) web site for its members, Lawrence Yun, the association’s chief economist, noted that “increases in home prices and mortgage rates have made sharp cuts in the housing affordability index.” Most recently it was at 156, the lowest mark in affordability in 5 years. Housing affordability, however, remains at historically high levels. Even with the recent cuts, the index is still at it fifth most favorable level in the last 40 years. Dr. Yun advises that even with the affordability index hovering around 120, as it did during the 1990s and early 2000s, the housing market was still fine with no major changes in home prices. For the affordability index to fall to 120, mortgage interest rates would have to rise to 7 percent. According to Dr. Yun, the housing market will only face significant problems if the affordability index drops to 100 or lower. For that to occur, mortgage interest rates would have to rise to 9 percent.
In recent months, mortgage interest rates have been in the 4.3 percent to 4.7 percent range. Dr. Yun suggests that rates may rise to 5 percent by the middle of next year and move up to 6 percent by sometime in 2015. To give you some idea of how these suggested increases could affect your personal financial situation, let me give you an example. Assume, you are planning on purchasing a home for $500,000 and putting 20% down, leaving you with a mortgage of $400,000. If you were able to get a 30 year fixed rate loan at 4.5%, your principle and interest payments would be $2,026.74. At the 5 percent rate Dr. Yun says you may face next year, your payment would be $2,147.29. At 6 percent, your payment would be $2,398.20, an amount that at the current 4.5% rate would enable you to borrow $473,311.95! If mortgage rates climb to that 6 percent rate and you want or need to maintain your payment at the $2,026.74 that you would pay on a $400,000 loan at today’s rates, you could borrow no more than $338,043.44. In the disaster situation of 9 percent mortgage rates, you would have to pay $2,026.74 on a mortgage of $251,887.18.
Since inevitable interest rate increases will affect housing affordability to a greater extent than short term home price fluctuations, now is a favorable time to buy the home you want.