Is the Benefit of Low Interest Rates Sliding?
By Nicole Rueth - September 12, 2020
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We talk about affordability and how this year's low interest rates have given buyers the ability to afford more home.. even more home than they could have a year ago. The Denver Post came out with an article this week stating Denver was unaffordable citing the statistics of a median home in the DMAR 11 county area today vs 1 year ago. I pulled up the September 2020 report (highlighting August data) and the September 2019 report as well as the Freddie Mac rates for the last week in August.
- 2019 $459,000 median home, 10% down, 3.58% rate, P&I = $1873
- 2020 $510,000 median home, 10% down, 2.91% rate, P&I = $1913 ($40 more).
A few of things they left out that that needs to be highlighted.
- 2019 $310,000 median home, 10% down, 3.58% rate, P&I = $1265
- 2020 $325,000 median home, 10% down, 2.91% rate, P&I = $1219 ($46 less).
- Attached is where the opportunities are for today's first time home buyers. The close to list was 99.61 for attached verses 100.26 for detached. Fewer multiple offers, discounts off list, and these low interest rates are giving those buyers who are willing to look long term, beyond the current COVID environment the opportunity to get in and still build equity. Attached saw a 5.86% gain in year to date median price growth.
- Small shifts in interest rates still make a difference. This past week rates dropped again to 2.86% dropping today's median priced home to a P&I of $1900. And only 1 week later in 2019 we saw rates go up to 3.78% where they stayed thru the end of the year.. making the 2019 median price home P&I go up to $1920. Making 2020 $20 LESS expensive on a monthly basis.
- Income is a part of affordability that everyone (including DP) seems to ignore. We are in the middle of a pandemic with an unemployment rate of 8.4%; meaning 91.6% are employed. Denverites who are employed experienced an average increase of 2.90% increase in Hourly Wages over last year and a 3.48% increase in Weekly Earnings. The difference in hourly and weekly? Weekly accounts for more hours worked in a week..which means people today are making more per hour and working more hours per week.
- Taking income into account, in 2019 a buyer needed a monthly income of $4355 a month to afford a P&I payment of $1873 at a 43% debt to income ratio. With a 2.90% year over year hourly increase, their income today is $4481/mo. At the same 43% DTI, that affords a P&I of $1926... MORE than the $1913 needed in the above example for today's median home with 10% down. IF you lock in today at 2.86%, that purchase price just went up to $517,000.. how about offering an appraisal gap?
Bottom Line: Affordability is getting strained by the lack of supply, increased demand, multiple bids, and ultimately rising home prices.. but we aren't there yet ... NOW is the time to buy! ... BEFORE home prices continue to increase and interest rates go up (Real Estate Agents... if you missed Friday's market trends, hop over to our agent ignite FB Group.. I'll tell you exactly WHY rates are going to go up next year).
Want to know how much you can afford today? Give me a call. We would be honored to support your leap into homeownership and building wealth through Real Estate!