Mortgage rates matter more than home prices
Reports from private and public sources say that home values are stagnant and/or falling depending on where you live. As a homebuyer, you probably consider this to be good news. After all, as homes get cheaper they become more affordable…or do they?
Home affordability has two inputs, not just one. They're (1) home price, and (2) mortgage terms. Unless you buy that next home with cold, hard cash, you're going to need a mortgage and, as mortgage rates go, so does the cost of homeownership. This is an overlooked fact among homeowners.
November 2010: It was the best time to buy a home
In November 2010, conventional mortgage rates fell to an all-time low. The combination of a weak global economy and an uncertain outlook for 2011 pushed the benchmark 30-year fixed rate mortgage down near 4 percent.
In hindsight, it was an excellent time to be a homebuyer.
With home values still fading throughout most markets, November's ultra-low rates made U.S. housing more affordable than during any time in the last 20 years, according to the National Association of Home Builders.
Cheap homes, cheap mortgage rates--what more could you want? It was no wonder sales activity spiked into the fourth quarter of 2010.
Like everything else on Wall Street, though, mortgage rates are unpredictable. By mid-November, the momentum that had driven rates to a 50-year low had reversed. Mortgage rates were quickly rising. Home affordability has since suffered nationwide.
Homeownership costs way up since November
As compared to those all-time lows from November, current mortgage rates are some 70 basis points (0.70 percent) higher. That's a rapid rise for such a short period of time, and its effect on household budgets is palpable.
For example, let's say you're buying a home with a $375,000 purchase price and making a 20 percent down payment. That's a $300,000, 30-year fixed rate mortgage.
- In November 2010, at then-current mortgage rates, the cost to pay the loan to term would be $532,431.
- In April 2011, at current mortgage rates, the cost to pay the loan to term would be $584,510.
That's a $52,079 increase in interest costs in just six months. As mortgage rates keep rising, those costs will go higher.
Rising mortgage rates outweigh falling home prices
To be fair, the example above assumes that home values have idled for the last six months, and they haven't.
According to the U.S. government, home values nationwide are down somewhere between 1 percent and 2 percent since November, with some markets outperforming others.
None underperform so poorly that the effect of rising interest rates is negated, however. For that to happen, the $375,000 home from six months ago would have to sell for $345,000 today--a drop of 8 percent. Home values aren't falling anywhere close to that fast.
Even in Phoenix--the Case-Shiller Index's worst-performing market--home values are down just 4.6 percent semi-annually.
Therefore, if you're buying a home and you're in it for the long-haul, understand that you'll save more money with a cheap mortgage than you will with a cheap house.
Besides, the cheap house will need upgrades. The cheap mortgage never will.