With so little meaningful data relating to interest rates this quarter, It is a good time to discuss housing affordability. Interest rates are only half the equation when it comes to being able to afford a home. The other half of the equation of course is price. Over the past 8 years housing prices have had more to do with the affordability of a house than rates by a wide margin. Below is an example of why impending house price increases may be more important than the Fed raising interest rates:
Let’s assume a home today is priced at $250,000 at today’s 30 year fixed rate of 3.75%. The P&I Payment with 20% down would be $926.23/month.
Using the Affordability Index formula a borrower would need an income of $44,450/year to qualify
If the rate increased to 4% the P&I would increase to $954.83/month and the required income would increase to $45, 830/year or an increase of $1,380/year
On the other hand if the $250,000 price increased 5% to $262,500 and the rate remained 3.75% the new P&I would be $972.54/month
The higher price would now require an income of $46,680 or an increase of $2,230/year from the original price. That is an additional $850/year over that caused by the ¼% rate increase.
With so little new construction and recent increases in Existing Home Sales, inventories are dropping and there are already many areas seeing 5% appreciation or even more. While not terribly important for rates they may indicate the need for a greater sense of urgency on the part of future home owners than any fear of rate increases.