Who thought mortgage rates were going to drop again? What is going on with these sub 5% rates and how does it affect our market? Just when we thought the tax credit had expired and we could shift our focus to whether or not the housing market could recover on its own legs. What do the rates really mean?
For starters, the low rates are being spurred by the investors “flight to safety”. Generally speaking, when the stock market goes up investors are positive about the future and are willing to chase that higher return for the risk of losing the total investment. When fear or uncertainty creep in about the future, investors don’t like that risk, so they sell the stocks and buy the bonds. When bonds are in demand the face value or “price” to purchase them increases, this drops the yield or interest rate you earn on them. What’s this got to do with us? Almost everything, in fact rates are a major contributor to overall home buyer affordability
When asked the question, what can you afford? A buyer will often quote a specific price range, i.e. I can afford a $200,000 or $300,000 home. In reality though that price range is the result of how much one can afford monthly. Pretty similar to buying a car or other big ticket item where financing is often involved. A buyer might say I want to stay in the $1,500 a month range. In today’s rate environment of say 5% that buyer could afford about a $280,000 home. Right here in Conshohocken, that means 30 some homes to choose from. Let’s say rates moved the other way to 6%, the number of homes that would now fit their revised max price of $250,000 would drop by 30% to 21!
This is just one example to show how the larger economic forces impact our local market. As a buyer, these low rates clearly open up more options. As a seller, you’ll have more buyers which should help increase demand, but we have to be weary of too much competition, which could force the supply/demand out of whack and drive prices down. In short, these world events and topics clearly impact all of us, even at the local level.