For months now we have been shouting from the roof-tops that mortgage rates were going up, and that “now” (then) was the time to get off the fence and buy. Turns out we were right-A New York Times article dated July 23 tells us that rates are climbing fast due to recent problems with Freddie Mac and Fannie Mae.
The real cost to buyers
For every 1% point increase in rates, buyers lose 10% in buying power. Let’s imagine that you can just barely afford the monthly payments on a $500,000 property. Now, imagine that interest rates go up by 1%. After the rate hike, a $450,000 property will demand the same monthly payment as the $500,000 property did before the rate increase. You have just lost $50,000 in buying power.
Unfortunately, this is not just a hypothetical situation-interest rates have already gone up over 1/2 point in the last month or so, so $25,000 just went down the drain for those who waited on $500,000 properties.
But Shouldn’t I Wait for Prices to go Down?
It’s natural to wait for prices to fall, but prices are going to have to fall a long way to make up for this coming increase in interest. For every 1% point increase in interest, prices have to fall 10% to keep the same payment. On Oahu, there is no neighborhood (not even Ewa Plain) where prices have fallen 10%.
If you are waiting to buy, you are up against the clock – and time is not on your side.
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