Also, as you know, the interest rates on mortgage loans are very low. We’ve probably heard it so many times that we’re numb to the term, but when you hear “historically low” in regard to mortgage rates, it’s true. “Historically low” as in “never been this low in history.” The problem is we’ve been bombarded so much by this information that it really doesn’t have much of an impact on us. What also lessens the impact is the fact that, separately, affordable prices and really low rates are sort of abstract concepts.

Example: Boise Real Estate Market Affordability Chart:

[Chart Provided by Jere Webb Publishing] (The Chart shows the Boise Real Estate Market having an affordability index reading of 26% in 2008, meaning that for people living in Boise Id, on average it will take roughly 26% of your median income to buy/own a median priced home. Now in April of 2012, the affordability index is at 13% which is means it is 50% cheaper to buy home now compared to 2008.)

When you hear a home is priced at what it sold for in 2002, for example, you don’t immediately think, “Wow, that’s cheap.” When you see a 30-year fixed-rate mortgage of 3.9-percent, it might not strike you as being significantly different than, say, the 5.5-percent mortgage you have on your home now. But how about looking at affordability from a more cohesive perspective? Instead of thinking, “low prices, and low rates,” let’s look at mortgage payments. After all, it doesn’t get any more real than that – it’s what the home costs you in real dollars each month. In the 1st quarter of 2012 the National Association of Realtors, showed that the median sales price for residential real estate was $163,000. The median interest rate on a 30-year, fixed-rate home loan was 3.95 percent in March. If you purchased a median-priced home with a median-rate loan with 20 percent down, your principal and interest payment each month would be $621.83. Five years ago, in March of 2007, the U.S. median home price was $257,600. The median interest rate on a 30-year fixed-rate loan was 6.40 percent. Assuming 20 percent down again, that’s a principal and interest payment of $1,289.04. That’s $621 vs. $1,289. In other words, the monthly cost for owning a median-priced U.S. home is less than half of what it was five years ago. Looking at it from a debt-to-income ratio, the way banks do, the $621 payment represents just 15 percent of the U.S. median monthly income. Banks typically want your house payment to be no more than 30 percent of your household income. In 2007, the $1,289 monthly payment was 30 percent of the annual monthly income of Americans in 2007. A recent price comparison survey showed that it’s now cheaper to buy than rent in 98 out of 100 U.S. metropolitan areas. If you look at the fact that the cost of the median home with the median interest rate has gone from eating up 30 percent of a household’s monthly income to just 15 percent, you can see why. If you’re an investor, the news is almost as good. The rates on investor loans have dropped significantly, too. They’re not as low as the rates on primary residences, but if you can put 25 percent down, you can get to within a point or so. And while you might not get all the way down to $621 with a median-priced investment property, even paying a full point higher gives you a monthly payment of $699.45 per month. Considering that rental rates have actually increased since 2007, the difference in monthly cash flow between a rental in 2007 and now is enormous. Maybe looking at the numbers from the monthly payment standpoint gives you a little different perspective. I’m not trying to insult anybody’s intelligence by simplifying a home purchase into a monthly cost, but the reality for most of us is that’s exactly what it is. We hear things like “lowest prices in a decade” and “lowest rates in history,” but until you sit down and apply it to real dollars and cents, those phrases can ring hollow. Add in the fact that we’re kind of numb to them because we hear them all the time. If you can only afford or want to afford a max payment of $1200/month with just 5% down, that will likely get you a home up to $250,000 with today's rates, and will give you a quite a few nice options in Boise Idaho market. However, if you wait, and something positive could happen in the US or European market, for example if Greece decides it is willing work with the EU, overnight interest rates could go up significantly. If interest rates bounce back to 6% this summer, which is still historically low, to stay within your same budget then the max you could afford is a $200,000 home. This $50,000 difference in the Boise Real Estate Market is huge, and you may not be very happy about your options at the level. Home prices in Boise are very similar to what they were in 2002, (10 years ago). However, in March 2002 the average interest rate on a 30 year fixed rate mortgage was 7.01%, so even if you bought a home 10 years ago, you would have been limited to buying a home up to $175,000 to keep your $1200/month budget rather than the $250,000 max price you can get today with the same budget. Home mortgage rates have been tracked over the last 50 years, and during that time they have averaged over 8.5%. [See Chart Below] So to think they will stay this low for ever is a costly mistake. Hopefully, now that you’ve seen actual examples, you will be less numb to the impact the next time you hear our broken record of how affordable it is to buy a home now. As the interest rate you get for your home loan has a HUGE impact on the quality of home you can afford.

[Data Source: FreddieMac.com]