Interest Rate vs. Purchase Price

A few buyers have recently expressed concern over purchasing a home now because they fear that home prices will continue to drop. They want to time the market and buy at the "bottom". What they fail to realize is that interest rates are near an all time low, and that an increase in interest rates will have a greater impact on their purchasing power than price.

In the following example, assume a buyer is pre-approved to purchase a $200,000 home while the 30-year FHA rate currently at 5%. Their monthly payment would be approximately $1322. Now assume the interest rate goes up to 6%. To keep that monthly payment, the home owner could only purchase a $180,000 home.

Home Price Rate Payment
$200,000 5% $1322
$180,000 6% $1320

In other words, the value of home would have to drop 10% in order to offset the one point increase in interest rate for this buyer to break even. In my opinion, at this price point such a price reduction is unlikely. Inventory of homes in this price range continues to decline as these homes are in great demand.

I work with a lot of first time home buyers, and this is the price point where many of them fall. I've been in competitive bid situations quite a bit lately in the sub-$200K market. That is why I recommend the buyers I am working with buy now.

The only way they could lose would be if home prices do continue to fall AND interest rates followed. But really that's not much of a loss either because they could still re-finance at the lower rate. If either go up (which history tells us they eventually will) the buyer is ahead of the game.