Bank of America is Keller Williams' new preferred lender!! At one of our team meetings a few weeks ago, we had an interesting conversation about how buyers want to wait until the market hits "bottom" before they buy. The problem is that interest rates are still very favorable, but will probably be rising! As interest rates rise, the price of a home that a buyer can afford decreases. When should you BUY??
Bobby Green with Bank of America explains it well with the following scenario:
The following grid will show you what a 1% increase in interest rate will do to the monthly payment at various loan amounts and how much more home a buyer could have afforded at the lower rate versus the higher rate. A grid of loan amounts is listed below followed by one example of a buyer and seller situation at one particular price point. These figures are based on principal and interest payments on a 30 year fixed rate loan and are rounded figures.
We want to help you sell more homes so call on us and we will be glad to help you explain this to your clients if you would like our help.
Loan Amount Pymnt @ 5.875% Pymnt @ 6.875% Difference in House Price Based on Higher Rate
$150k $889.00 $988.00 $21k *A client could by a home for $21k more at a rate of 5.875%, for the same payment, that they could at 6.875%
$175k $1036.00 $1151.00 $24k
$200k $1183.00 $1313.00 $25k
$225k $1329.00 $1476.00 $28k
$275k $1627.00 $1807.00 $34k
$350k $2072.00 $2301.00 $44k
$425k $2517.00 $2795.00 $53k
$500k $2954.00 $3285.00 $63k
Examples:
Buyer - Buyer wants to buy a home but wants to hold out for the price to drop from $225k to $200k (assume 100% financing for these purposes). If the rate goes up from 5.875% to 6.875% then the client's payment will be the same on the house at $200k at 6.875% as it would have been on $225k at 5.875%. If the seller only came down to $210k and the rate went up 1% while the buyer was waiting then they would have been better off buying at $225k at the lower rate.
Seller- Seller has a home listed with you for $225k and you know they need to reduce it to $200k to sell the home but they want to hold out for a better market, the perfect buyer, etc. If they hold out and the rates went up 1% then their buyer pool goes down significantly as the buyer now has to pay $ 130.00 more per month for the same loan on that home. It also slows the market down as rates go up and that can create more depreciation to overall home values in an area as inventory would potentially increase as well.
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I've thought about putting some numbers together on this concept. You've made it all clear. The next question is - what would cause the rates to go back up? I know they've jumped back up a couple of times recently, even as the Fed is lowering rates. Maybe if we all understood that there is very little correlation between the Fed lowering rates and the mortgage interest rates, it would be easier to see that interest rates are more likely to increase in the near future than decrease....