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Purchase Power Declines as Rates and Prices Climb

Increasing Rates and Home Prices Push Purchase Power Lower

Increasing Rates and Home Prices Push Purchase Power Lower

Orange County, CA – Americans firmly believe that owning their home is a quintessential part of the American dream. Landowners have always faired well financially. In addition, homeownership happens to spur the economy nicely. Every new home built creates 3 permanent jobs for the period of 1 year. That’s why we have government policies that encourage homeownership. It’s also why, even as the housing market starts to turn against the buyers, their response as consumers isn’t to back off: it’s to double down. But their purchase power is declining day by day.

The Case-Shiller home price index on Tuesday showed a 12.1 percent increase in prices  from April 2012 to April 2013 — the largest gain since early 2006. That’s a striking increase in home prices over the course of a year, and a classroom economist might think that in response, the number of buyers would decrease.

But wait! There’s more!

The average 30-year fixed-rate mortgage rose from 3.93 percent last week to 4.46 percent this week (June 27), according to Freddie Mac’s national Primary Mortgage Market Survey.  More than a half of a percent in a single week. It might not seem like much up front but it’s the biggest weekly gain in 26 years. Calculating the total payout of a mortgage over 30 years will show you that a half a percent is measured in the thousands of dollars. Over the course of 30 years, this week’s increase in rate would add $33,000 on a $300,000 loan. That’s an extra $94/month and $1,128/year.

That certainly has to be driving buyers into hiding, right? Surely people would rather rent than pay 12% more for their homes and.53% more on their mortgages?

Of course not!  Most people know a trend when they see it. Home prices are going to keep going up, and mortgage rates are going to keep going up. We know that if we want a home, we want it before it gets even more expensive. The more expensive it is, the less home we can afford to buy. And that’s the real decline in purchase power. 

With the spike in mortgage rates, buyers have already taken a pretty significant hit to their purchase power. As rates increase so does the monthly payment as well as the qualifying debt to income ratios. Buyers who could have bought the home they were looking at a week ago are being forced to downgrade their expectations because they didn’t lock in their mortgage.

This will continue for the foreseeable future. Even if rates reverse direction, prices are unlikely to retreat. At best, a decline in rates will wash the increase in prices neutralizing the effect on a buyer’s purchase power.

The increase in interest rates came in response to the Federal Reserve talking about events that will be happening in the future. The event they are talking about is the tapering off of their bond buying program. They’ve been infusing the market with money via their bond buying program know as Quantitave Easing (QE3). It’s like taking a drug addict off thier medication…the withdrawals are hard to manage. As they begin this program, rates will continue to rise unless other powerful market forces crop up to counteract them. This means that buyer’s purchase power will deteriorate on future rate increases.

That means that if you want to acquire the home you’re looking at today you’d better move fast. Not only are there dozens of other qualified buyers looking at the same home, but changing rates might just rob you of your purchase power even if no one else makes a bid on it.

Contact us to learn today’s interest rates and see if you qualify.

Scott Storace

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