Focus On Interest Rates

Typically, I try to keep this blog to a narrow focus on real estate developments here at home. Most of us have any number of resources that we can go to for national or state news. Some of those are even reliable. Today I'm going to step outside the usual focus to share with you some data that I found that puts interest rates into a historical perspective.

When buyers start home shopping, most of them start out by thinking about the price of the homes. Then they go talk to a lender, and they figure out that they need to readjust their focus slightly from price to payment. In our line of work, I can tell you that we make a big distinction between a buyer prospect who has done some homework with a lender, and one who hasn't. The first one has a good idea of exactly what a price means to his/her payment, and the second one might not. And this is where interest rates come in.

How big a difference does an interest rate make? Well, on your run of the mill $200,000 home financed with a 3.5% down FHA loan - a pretty typical scenario in our market - a difference of a point is about $125 a month. That's significant to most of us. Interest rates can make all the difference in the world not only in what buyers can afford, but in some cases whether or not they can buy at all.

In recent years, interest rates have been very favorable. In recent months, however, they've gotten to be almost ridiculous. For a little perspective on this, I did a little looking around, and I found a good historical source for interest rates from Freddie Mac. They have numbers on 30 year fixed rate mortgages going back to 1971, complete with the average points starting in 1972. I factored in the points over the life of the loan to come up with an effective interest rate. And because I'm the geek I am, I put it on this chart. I can't help it, it's a disease.

All I can say about that data is "Yow!". Over the past 38 years, the median effective interest rate has been 8.57%. In recent months, we've been hovering around the 5% mark. This has been one of the factors that has been driving demand in our market, no doubt about it. We keep hearing that we're going to start seeing rates creep back up, and somewhere along the line, it almost has to happen to some extent. The big question is when and how much? I wish I knew.

I will say this much, though. If you've been wanting to take advantage of this market and buy something, I wouldn't hang around waiting for prices and rates to get better if I were you. What happens to your payment if rates go back up to 6%? What about 7%? And with the data we have, how preposterous does that prospect look?