Buying Power

In less than four weeks buyers are going to lose a lot of buying power! Everyone knows that the tax incentives expire at the end of April but there's more to it than that. Some buyers are telling me that they are waiting to take advantage of the foreclosure glut that we have already seen start coming on the market. That's a good point because there are 3.5 million new foreclosures expected to come on the market in North America this year. Then, another 2.5 million are expected next year! So, what's the problem with buyers waiting for them? It's all about buying power! There are three factors that have created terrific buying power for today's buyers. 1. Tax incentives 2. Extremely low mortgage interest rates 3. Plenty of inventory in most cities in America These three combine to give today's buyers a lot of buying power. However, these buyers will soon lose two of these three factors. With them they will see a huge amount of their buying power go! At the end of the tax incentives they will lose either $6,500 or $8,000 depending on their situation. However, many people haven't paid attention to the impact of increasing interest rates! This will be an even greater loss in buying power. Take a look at this: * On a loan of $100,000 a 1% increase in interest rates will cost a buyer $11,500 in buying power and cost them $23,040.00 over the life of the loan * On a loan of $200,000 a 1% increase in interest rates will cost a buyer $23,000 in buying power and cost them $45,720.00 over the life of the loan You can see that the numbers get even larger with higher loan amounts. So, buyers need to understand that a drop in home prices over the next several months can easily be lost by an increase in interest rates. Why would anyone play that game when they can buy today at historically low rates, with a great selection of properties that are already priced to sell and they don't have to deal with bank owned properties. Instead, they are dealing with homeowners who care about the property and who need to sell. Will interest rates climb this year? The quick answer is, YES! Why? because the Fed stopped buying Mortgage Backed Securities at the end of March. This has already caused bond prices to go down and, in turn, mortgage interest rates to go up. At the time of this post the rates have already increased about 1/4% and it's only April 2nd! How long will it take to go up a whole point or more? Who knows but every bit they increase will cost a buyer dearly. All Realtors need to inform their clients about what these changes are doing to their buying power. We need to ensure that we understand the market and transfer that knowledge to our clients. In reality, that's what they pay us for, not just to open doors and say, "see, here's the kitchen... isn't it beautiful!" lol