Just how important are today’s low interest rates?

I work with a lot of first time buyers, who often ask me “How do we know the market won’t drop further? I think I should wait to buy.” My answer is always the same: I don’t have a crystal ball, but I look to the job market as a reliable leading indicator for the housing market, and also keep a close eye on interest rates.

The DC area has the lowest unemployment of any major metropolitan area in the U.S., and has for some time now. Where there are jobs (and especially high-paying white collar jobs like we have in this area), there will be people moving here to claim those jobs. And where there are people, there is a need for housing, whether it’s rental or purchase.

But can market prices drop? Of course they can. We just went through that in the past few years after the run up in local prices from 2002-2005(ish). But if you believe that we’re near the bottom, it may not be worth it to wait any longer because any gains you make via lower prices you’ll lose in purchasing power because of interest rates.

Interest rates, in case you hadn’t noticed are now at 50 year lows, hovering in the mid-4% range. Let’s take a look at a $400,000 loan, which would be typical for a first time buyer in our area. When we compare a 4.5% interest rate to even a slight increase to 5.0%, the principal and interest portion of a mortgage payment jumps from $2027/month to $2147/month–a hike of $120 a month. That’s $120/month OUT of your pocket if prices stay the same.

Another way to think about it is to figure out how big a price drop you would need to see in order to make up that 1/2% interest rate difference. It all depends on the loan amount, of course. In our example of a $400,000 loan, a buyer would need the loan amount to drop by an additional 5% to make up for the 1/2% interest rate jump (it’s not exact…actually a buyer would still pay $13/month extra, but it’s close enough for our illustrative purposes.)

So buyers, don’t get so obsessed with the tree that you miss the forest. Prices are low, interest rates are ridiculously low. Which is more likely: another severe drop in prices in our area, or a slight increase in 30 year interest rates? Plan accordingly.

If you need help starting your home search, contact us or attend a free first time home buyer seminar.


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