When a buyer gets pre-approved one question I always ask is how much of a payment can they afford? Not how much we will approve you for, as that may be a different number.
The affordability of a payment is made up between the loan amount, interest rate, down payment, taxes, and insurance. In the current market we have rates that are running along the all time low levels. Along with these all time low rates we have depressed housing prices, which are the lowest most of us have seen in our career. Couple these two and you have an AMAZING deal! However there are some buyers that want rates to be lower and housing prices to be lower. Will that happen??? Only time will tell. There is a better chance of these rates and prices bouncing off the bottom levels then there is with them going even lower.
So, what would happen if rates increased a full 1%? A good rule of thumb is for every 1% increase in rates, in order to keep your payments the same a buyer would have to lower the loan amount by 10%. For a person buying a home with a loan amount of $200,000 with a rate of 4%. If rates went up to 5% then the loan amount would need to decrease by 10%, which would be $180,000 loan to keep the same payment. That is a HUGE purchasing power difference in a house!
Now keep in mind that once the government announced that we were in a recession we had already been in it for 1 year. A bottom in the market is never realized until it is no longer attainable.
Next time you have a buyer wanting to wait a little longer because they do not think the bottom is here. Run these numbers by them and see what they say. Rates are not going to stay here forever and nor are housing prices.