With all the worrying associated with Covid-19, asking ourselves if there is a recession on the horizon,or an imminent housing crash mortgage rates seem to be an afterthought, instead of an important component of the overall housing market.   When roughly 80% of real estate transactions require a mortgage,  rates directly affect the purchasing power of buyers, and therefore the overall health of the housing market.  Simply put, lower rates allow buyers to afford more home for the same payment, which, in times of tight inventory, allow sellers to maintain prices.

If inventory affects the supply (sell) side of the housing market, mortgage rates affect the demand (buy) side.  Mortgage rates are at their lowest levels in 50 years, as the chart below shows. Since 1970 there is a steady decline of mortgage rates, from high double digits to the low single digits we are experiencing today.  It is hard to imagine people buying homes with double digit mortgage rates when today we enjoy rates under 4%,  unheard of even 10 years ago. 

Lower mortgage rates give buyers more purchasing power. The chart below shows the impact of mortgage rates.  In 1980, for example, with 30 year mortgage rates at 18%,  a $1,000, monthly payment got you a $66,353, mortgage (this is a direct Principal and Interest payment, no calculation of taxes, insurance, or mortgage insurance).  Today, with Mortgage rates at 3.5%,  the same $1,000, monthly payment corresponds to a $222,695. Each percentage point translates into roughly $15,000, to $20,000, of additional purchasing power, per $1,000. In a tight market like the one we are in, with multiple offer situations, this can make the difference in getting an offer accepted for your dream home There is no clearer example of how mortgage rates influence buying power!

BUYING POWER

Looking at mortgage rates differently, below a chart of the monthly principal and interest per rate for a $100,000, loan. Again, its easy to see how lower mortgage rates help buyers. A $100,000, loan in 1980, would have a monthly payment of $1,807, at 18%, compared with a $422, payment today.

Rates
Payment per $100,000 loan

Though the mortgage rate you ultimately get depends on many factors, credit and type of program being most evident, the charts and graphs above illustrate how rates affect purchasing power.   So while news coverage focuses on tight inventory and a sellers’ market, buyers should focus on mortgage rates as their ally by increasing affordability.   Historically low mortgage rates allow move up buyers and first time home purchasers flexibility, take advantage of what is happening today to achieve your goals in real estate.