Double Whammy

How much less home does a quarter million dollars get you today compared to a year ago?

The answer might blow you mind because it will get you nothing. How can that be? It’s because home buyers today are getting hit with a double whammy. Appreciation the past year has been extremely high and interest rates have increased significantly. Surprisingly, a two percent increase in the interest rate has had a greater impact than the appreciation over the past year. Here’s how that works. The average priced home along the Wasatch Front currently is about $615,000 compared to about $506,000 a year ago. The average interest rate for a 30 year mortgage is a little over 5% now compared to a little over 3% a year ago. The same home today costs over a $100k more than a year ago due to appreciation and if you finance the purchase, it will effectively cost you another $150k. The means that an extra quarter million dollars will get you no more home today than a year ago.

The financing part of that equation works like this. Assuming a down payment of about 10%, a loan of about $550k would be needed today to purchase the average priced home. Assuming a 5% interest rate, works out to a monthly payment of about $3k for principle and interest for a 30 year loan. That same $3k per month payment with a 3% interest rate would get you a loan that is about $150k higher than at 5%. To be fair, the full impact of interest rate changes will not be known for years. That is because most people refinance their home loans at some point. If and when current buyers refinance their loans will determine the full impact of the current rates. If these buyers are able to refinance their loans in the near future at significantly lower interest rates, the impact of the current rates will be minimal, but if they are not able to refinance before they sell their home later, the full impact will apply.

So how is the double whammy of higher interest rates and high appreciation going to impact home prices going forward? The impact of interest rate increases takes some time to see in the marketplace because it is usually 30 days or more between making an offer and closing on a home purchase. Home prices so far this month are up a little from last month, but the rate of increase is much smaller than earlier in the year. I expect the trend of stabilizing prices to continue. Although significant price reductions seem warranted in light of the above discussion, I don’t expect them in the near future. That is because demand for housing remains high. The reason for this high demand would make a good topic for a future blog post. Until then, happy trails!