As rates rise, your buying power falls
Zillow says that homebuyers getting a mortgage now will pay significantly more than buyers two months ago, even as home prices have dropped. That's because interest rates are up.
People getting a median-priced home in the Baltimore area and making a 20 percent down payment on a 30-year fixed-rate loan will pay $1,188 extra a year than if they'd borrowed in April, Zillow says. (It based its calculations off rates offered through its Mortgage Marketplace to borrowers who had "good or better" credit scores.) The change in the annual percentage rate? From 5.75 percent in April to 6.44 percent in June, Zillow says.
It's a useful reminder that dropping prices won't always mean a better bottom line.
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Comments
HA. And yet another reason for sellers to drop prices. If a buyer can only afford X amount per month, then the home price will need to drop to compensate for rising financing costs. I'd rather buy a house with 15% rates since I could either pay more cash or just refinance on the next cycle. The only way out of this mess is to raise interest rates or else the bond market will (has been) do it for the Fed.
So to recap, raising mortgage rates means falling home prices. Unless of course incomes were growing faster than home prices or interest rates, but something tells me the exact opposite is happening.
I hope people keep thinking me and my site are crazy, cause I've been right all along. I said buy gold two years ago, I called for the DOW to peak last August, I called for shorting homebuilders, banks, and financial 18 months ago. I called for crashing homes sales and falling home prices. Listen people, if you NEED to sell, cut your losses and get out. If you don't need to sell stop trying. And people, stop trying to keep up with the Jones.
Posted by: Kevin | June 27, 2008 5:54 PM
Rising rates won't help sellers -- people can afford more house when rates go down and less when rates go up -- but that doesn't mean sellers will react immediately by dropping their prices. So someone who's about to buy quite soon and hasn't locked in a rate might want to recalculate his or her price range, just in case.
Posted by: Jamie Smith Hopkins | June 27, 2008 6:01 PM
I agree with Kevin. Sellers, you were gouging before the rates went up, you should have come down then. Ha ha, now you'll have to come down even more. In the movie, Wall Street, Michael Douglas had it wrong. Greed is bad.
Posted by: Anon | June 27, 2008 6:08 PM
Greed is a term easily bandied about. Yes, there is some greed involved here, no doubt. But from a homeowners perspective, it's a tough pill to swallow when you find out that you're home has lost more value in six months than your family makes in an ENTIRE YEAR.
Facts of life? Yes, but it shouldn't be assumed that financial hits like that should be accepted with a smile, either. Home sellers are struggling to come to terms with how little their house is really worth right now. It's not made any easier when everything else in their life is steadily becoming more expensive.
Posted by: Jonathan Benya | July 4, 2008 5:46 PM