Housing prices boom but monthly payments remain steady?

Written by: Allie Schmidt, Financial Advisor, CFP ®, CPA

We’ve all heard the commercials saying “mortgage rates are at (or close) to historic lows…” and they aren’t lying, but what does that mean to the overall affordability of homes, and most importantly, your monthly budget?

Let’s take a quick peek at the overall interest rate environment.  The 10 year US Treasury yield is at 2.19% and the 30 year is not much better at 2.77% (according to Yahoo Finance on 8.24.17).  To give some perspective, the historical 30 year US Treasury averages 6.81%, and the 10 year US Treasury historical average is 4.98%.

In my opinion as a financial advisor, with rates this low, stay away from long-term bonds and consider this one of the worst times to buy bonds, or in essence lend a company or municipality money.  So, if it’s one of the worst times to be a lender, one could argue it’s likely one of the best times to be a borrower.

I’ve heard people talking about a potential “bubble” in real estate or that they plan to “wait it out,”  which to them means to wait out this blazing hot real estate market for prices to come down. I encourage folks with a similar mindset to first consider the debt service, or the mortgage payment each month, not solely the sticker price of the house, before sitting tight.

For many of us, home purchases are highly financed, even putting 20% down, you’re still taking hundreds of thousands of dollars in a loan (80%), which means that the interest rate on that loan is potentially the most important factor when considering affordability.

Let me show you an example.

You purchased a home in West Highland in 2006 for $350,000, put 20% down, received a 30 year fixed rate mortgage at the average July 2006 rate of 6.76%*.  You had a monthly principal and interest payment of $1,817.94**.  Now…fast forward to July of last year, 2016.  You purchased a home for $500,000, put 20% down, received a 30 year fixed rate mortgage at the average July 2016 rate of 3.44%*.  You would have a monthly principal and interest payment of $1,782.81^.  (This is a hypothetical example for illustrative purposes only.)

Despite a $120k larger loan and a significantly more expensive home, due to the dramatic difference in interest rates, your monthly principal and interest payment are actually slightly less.

I’m certainly not a real estate expert, nor am I making a home pricing forecast.  I’ll leave that to the kind folks at Nostalgic Homes up the street.  I’m just looking at it from a numbers perspective and historic averages.  There are a lot of reasons not to purchase a home, but I can’t get on board with the idea that homes are going to become cheaper any time soon, especially when we believe the next significant move in interest rates has nowhere to go but UP.

*According to freddiemac.com

** Mortgage calculator at bankrate.com, $280,000 loan principal, 30 year fixed, 6.76%.

^ Mortgage calculator at bankrate.com, $400,000 loan principal, 30 year fixed, 3.44%.

Your results will vary. The hypothetical rates of return used do not reflect the deduction of fees and charges inherent to investing. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.