Economist's Commentary: April 21, 2008
Lower Price vs. Higher Rates
By Lawrence Yun, NAR Chief Economist
Which is better for a homebuyer: lower home prices or higher mortgage rates? The Fed is nearing the end of its interest rate cuts by the end of this month. Whatever the size of the cut in the upcoming FOMC meeting on April 30th, that will be the last one in this cycle.
Many homebuyers are sitting tight wonder when to time their purchase. That timing is often thought of in terms of prices while considering potentially higher rates. Let's examine the trade-off. The table below shows the required monthly mortgage payment by loan amount and mortgage rate. Consider a $200,000 loan. At a 5.8 percent mortgage rate (Freddie Mac's rate from last week), it requires a monthly payment of $1,174. Assuming home prices do fall an additional 5 percent in your area, thereby lowering the loan to $190,000, but rates rise to 6.3 percent, then the monthly required payment becomes $1,176. The fall in home prices gets negated by rising mortgage rates. In areas where home prices do not fall (as is the case in 70 percent of the U.S. market), then higher rates will make housing affordability more difficult.
|
Monthly Mortgage Payment |
|
||
|
|
Loan Amount |
|
|
|
Mortgage Rate |
$180,000 |
$190,000 |
$200,000 |
|
5.6 |
$1,033 |
$1,091 |
$1,148 |
|
5.7 |
$1,045 |
$1,103 |
$1,161 |
|
5.8 |
$1,056 |
$1,115 |
$1,174 |
|
5.9 |
$1,068 |
$1,127 |
$1,186 |
|
6.0 |
$1,079 |
$1,139 |
$1,199 |
|
6.1 |
$1,091 |
$1,151 |
$1,212 |
|
6.2 |
$1,102 |
$1,164 |
$1,225 |
|
6.3 |
$1,114 |
$1,176 |
$1,238 |
|
6.4 |
$1,126 |
$1,188 |
$1,251 |
|
6.5 |
$1,138 |
$1,201 |
$1,264 |
|
6.6 |
$1,150 |
$1,213 |
$1,277 |
|
6.7 |
$1,162 |
$1,226 |
$1,291 |
|
6.8 |
$1,173 |
$1,239 |
$1,304 |
|
6.9 |
$1,185 |
$1,251 |
$1,317 |
|
7.0 |
$1,198 |
$1,264 |
$1,331 |
Depending upon how fast the economy improves in the second half, the Fed will not hesitate to raise rates because inflation is already uncomfortably high. Rate hikes could occur as early as October of this year.
Mortgage rates, of course, do not necessary follow the direction of Fed funds rate, which the Federal Reserve directly controls. It may even be the case that the low point on 30-year fixed rates may have already passed (on loans of less than $417,000). The rates on the newly created jumbo conforming loan rates (on loans higher than $417,000 and less than the new higher loan limit) will see some reduction. Freddie Mac announced last week that it will start purchasing jumbo purchasing loans from several major financial institutions, thereby, replenishing capital to lenders.
Housing affordability conditions have been improving in the past year in many parts of the country from falling home prices, attractive mortgage rates, and rising income. However, any help from mortgage rates may have come to an end. Homebuyers waiting for a better deal (in terms of lower prices) may be in for a surprise from higher rising rates.
What should the buyer do then? Market timing involves some degree of luck. But for someone who plans to own for the long haul, the differences on whether one bought a year earlier or later really do not matter all that much. My colleague's research on consistent housing equity gains for people with long-term holding period affirms that view.
This is one in a series of commentaries by the Research staff of the National Association of REALTORS®. Read more commentaries >
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