Mortgage Rates Drive Purchasing Power

Offering a special glimpse into the financial realm, M Realty’s preferred lending partner, Guild Mortgage’s Brent Lucas provided this illuminating chart and information showing the impact of mortgage rates on actual buying power.

Mortgage Rates Drive Home Affordability and Buying Power
“How much home can I afford?” It’s among the most common questions asked by a home buyer and the starting point for nearly every home search in the country.

Changing mortgage rates do more to influence home affordability than changing home prices.

If that seems strange to you, think back to the last two years. Quarter-after-quarter, home affordability stuck near all-time highs even as home values have recovered from “the bottom.” Home affordability didn’t improve because home prices were lower — it improved because mortgage rates were at their lowest.

Each time rates ticked lower, a buyer’s purchasing power increased. When mortgage rates reached their lowest in November of 2012 (3.35%), affordability had peaked.

Lately, however, the trend has reversed. Mortgage rates have pushed past 4 percent and the answer to “how much home can I afford” has changed as well.

Take, for example, the hypothetical home buyer in Portland who was pre-approved in May 2013 for a maximum $475,000 loan amount, assuming 20 percent down. While she’s been shopping, U.S. Mortgage rates have been on the rise. Unfortunately, with each 0.125 percentage point increase to rate, her maximum purchase price has dropped $7,200. Today, that same buyer can afford a home for $424,326.

Do You Know Your Buying Power Now?
Mortgage rates have had some ups and downs over the past few months. Today’s home buyers — pre-approved or not — should consider a re-pre-approval; a re-verification of terms and a re-qualification for a mortgage.

Interest rates and purchasing power affect home prices, too. Lower rates allow buyers to offer higher prices for homes. When affordability drops because rates rise, the number of buyers who can afford higher prices drops too, which of course reduces demand. When demand drops, there is less competition for homes. It is competition for homes that is driving prices up in the current market. In the past, when the competition for homes decreases, prices have “softened”, meaning the steep increases slowed, flattened, or even dropped some.

Ask me if you’d like to be professionally connected to helpful financial tools like Brent’s. You can interact with his mortgage calculator at