With the recent bad news in loan rates (an increase in the current mortgage rate by almost 1% in 3 weeks), I felt it was time to address the affordability question that most don’t think about.  For those of you sitting on the fence right now asking yourself is now a good time to by or should I wait for prices to fall, consider the following. 

With all the talk of softening markets, many buyers have moved to the sidelines hoping to wait out high prices, believing that lower prices will help them along the path to homeownership or to move up into the house they really want.  Does this sound familiar?

Instead of prices,buyers should really keep their eyes on interest rate increases - your ability to purchase that now-affordable home may have just vanished with interest rates running up.

I came across an information sheet comparing buying power on a household income of $100,000 to demonstrate this point and it was quite telling.  In this example, if you are waiting for prices to drop $50,000 before you buy, hoping to get a better deal, well, quit waiting.  If interest rates increase, like they just have, your payment won’t come down with the lower prices.  In fact, you may still be sitting on the sidelines.

Even at 6.7% , historically, that rate is some of the lowest rates you’ll ever see.  however, at that amount, the above buyer will only be able to buy about $399,411 worth of house.  Just a few weeks ago, that same borrower could have borrowed $450,000 at 5.63% on a 30-year fixed mortgage.  Neither the buyer’s income nor the home price decreased the buyer’s buying power, just the interest rate.

Here are the details: A 30 year fixed rate mortgage for $450,000 at 5.63% would cost a borrower $2,591.87 a month.  For that same borrower waiting for prices to drop, but watching interest rates jump to 6.7%, that same $2591.87 will only fund a mortgage of $399,411.

This amount does not even match the median home price for a Single Family Home on Oahu, and we are seeing a leveling out of prices currently, not price reductions.  That is also an 11% decrease in the sales price to offset the increase in the interest rates. Consider this quote as well:

“The 2007 median price for an existing home is forecast to decline 0.7 percent to $220,300, the first drop since the real-estate trade group began keeping records in 1968 and probably the first decline since the Great Depression, said Lawrence Yun, an economist with the Chicago-based association. 

Just something to think about if you have been trying to time the market.