Home Buyers Getting Pressure on All Sides


Over the past few months, we’ve seen some drastic changes in our economy and the end result is that some home buyers are getting pushed out of the market. We’ve seen home prices continuing to rise 20% over last year, interest rates rising by multiple percentage points, and inflation causing families to spend more money on gas and groceries, so they have less in their budgets for their housing. All these factors combine to unfortunately push home ownership out of reach for some families.

While most people understand the supply and demand issues affecting real estate prices, and we’ve certainly heard of supply chain problems and the war in Ukraine causing the prices of goods and services to increase, not everyone understands interest rates and the drastic impact that has on purchasing power.

The rule of thumb is that your total cost of your housing should be no greater than 28% of your gross monthly income. So, a married couple earning a combined $120,000 per year ($10,000 per month), should not pay more than $2,800 per month for their total cost of housing. Now you have to back out of that number the cost of insurance, property taxes and HOA fees. If we estimate those at 15% that leaves $2,380 per month you can spend on your mortgage.

At a 3.5% interest, where rates were just a few months ago for a 30-year mortgage, a monthly payment of $2,380 could get you a $530,000 mortgage. So, you’re looking at buying a home in the $500,000 to $550,000 range. However, at a 5.5% interest rate, where rates were this past July, you can only afford a $419,000 mortgage so you’re buying a $400,000 to $450,000 house. That is a loss of $100,000 in purchasing power. 

When you couple that loss in purchasing power with the fact that homes prices are continuing to rise, many potential home buyers will be priced out of the market.

The interest rates have risen as the Federal Reserve Bank attempted to slow inflation. However, it is important to realize that we have a long way to go before interest rates get to levels seen in the past.  Historically speaking, with interest rates now in the 5-6% range, that is still low compared to the historical average of around 8%. 

Looking over the past few decades, starting in the 1970’s, the interest rate on home mortgages averaged around 9%, then in the early 1980’s it shot up to 16% before settling around a 12-13% average for the decade. In the 1990s the average 30-year fixed mortgage rate was around 8% before dropping to just over a 6% average in the 2000s.  

Lastly in the 2010s, the average 30-year fixed mortgage rate over the decade dropped to 4.08%.  

And 2010 marked a slow recovery following the Great Recession. Over the last decade, there have been ups and downs, but nothing has rattled the economy like the 2020 coronavirus pandemic, and the Fed responded by resetting interest rates. The 2021 average 30-year fixed mortgage rate drastically fell to 2.96%, the lowest on record, which played part in creating more demand from buyers.

What’s important to realize in all this history, is that homes are permanent while interest rates are temporary. While you may only live in a home for 5-10 years, you are building equity that will transfer to the next home. If rates fall in the next year, you can always refinance your mortgage, while owning your home and are investing in your future.

If the time is right for you to purchase a home, and if the payment from slightly higher interest rates still fits into your budget, it is still a great time to buy.  

Tony Veldkamp is 2022 President of the REALTOR Association of Sarasota and Manatee and a Senior Commercial Advisor at SVN Commercial Advisory Group.

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