If You Are Ready To Buy Now, You Can Still Capture Crazy-Low Mortgage Interest Rates.
Unless we are ready to throw the supply-demand price curve out the window completely, we have to assume that the more costly mortgage payments that a new homeowner will make on a 5% or 6% mortgage compared to a 5% mortgage will put downward pressure on the underlying home prices.
Lets check out the actual cost difference on four price levels. Each number will represent an approximate monthly payment, including principle/interest/property tax/insurance with a 20% down payment and 30-year fixed-rate mortgage.
A $250,000 home (condo) almost non-existent in Los Angeles County
4% = $1300
5% = $1420
6% = $1540
A $500,000 home – Approximately the median home price in LA County
4% = $2600
5% = $2840 (this happens to be the approximate median rental rate in LA County without tax deduction benefits)
6% = $3080
A $750,000 home
4% = $3900
5% = $4260
6% = $4620
A $1,000,000 home – Starter home in most Westside communities
4% = $5200
5% = $5680
6% = $6160
Another way to look at the above is to consider how much the same purchaser could pay for a home and have the same monthly payment. In our first case, the buyer would need to pay $192,000 instead of $200,000, or 4% less if the interest rate climbed to 5%. Or $184,000 if interest rates climbed to their “normal” level of 6%
Using the same 4% and 8% drop on each example, you would see:
$500,000 home at $480,000 or $440,000
$750,000 home at $720,000 or $690,000
$1,000,000 home at $960,000 or $920,000
So those who buy homes today with interest at 4% run the risk of seeing an 8% drop in the value of the home if interest rates return to normal and everything else remains the same. Of course, everything else never remains the same.
According to Trulio, we are only building residential units of all kinds at a rate that is 50% of the historical norm. Meanwhile, the population continues to swell. Millennials have, for various reasons, chosen to keep renting, thus swelling the ranks of the potential future buyers. In fact, homeownership has dropped to the lowest percent of the total population in over 30 years. And for most of Los Angeles, there is almost no inventory for sale or for rent.
Drops in the value of Los Angeles residential real estate have never been tied to climbing interest rates, even in the Jimmy Carter inflationary years. Recessions, changes in the work force, and changes in tax law have had far more effect. And housing recessions have commonly taken away 40% to 50% of housing values. This makes the 8% reduction seem paltry, were it to even happen.
Potential owners would also be reviewing the cost to rent vs cost to own equation. Currently, even with LA homes having passed the values of the 2007 bubble, the cost to own is lower than the cost to rent.
What does this mean to you?
If you are ready to buy now, you can still capture crazy-low interest rates. If you are planning to stay in the home for many years, this will be a huge benefit over time. You can also make the purchase without worrying much about the affect of higher interest rates on the value or the potential resale.
If you really want to purchase, but you are not ready now, the potential interest rate increase will not likely make your monthly payment out of reach. But you shouldn’t hold your breath thinking prices would come down. The price increases are likely to continue, unless there is a recession.
If you are looking for an investment property for the long term, the obvious conclusion is that taking advantage of low interest rates makes huge sense. While property values are high right now and inventories or low, a sharp buyer can still find excellent investment opportunities.
At any point in time that you are ready to buy real estate for your family residence or vacation property or as an investment vehicle, and you need a mortgage, call Bill Rayman for an in depth review of your needs and the best possible mortgage product for your specific circumstance. Phone: (424) 354-5325
Bill Rayman Home Mortgages
mortgage broker for home loans and mortgage banker
12121 Wilshire Boulevard, Suite 350
Los Angeles, CA 90025