Lower Home Price & Higher APR Is WORSE Than Higher Home Prices

  • November 8, 2022
  • 3 min read

The intersection of interest rates and home affordability is a crucial consideration for prospective homebuyers, especially in a dynamic real estate landscape. In this blog post, we’ll delve into the impact of interest rates on the affordability of homes, using a mortgage calculator to illustrate potential scenarios.

Understanding the Mortgage Landscape

To grasp the nuances of this relationship, let’s use a mortgage calculator as a tool for analysis. For our calculations, we’ll consider a loan amount of $540,000 for a 30-year fixed-rate mortgage at 3.8%. This interest rate is reflective of conditions about a year or a year and a half ago.

Scenario 1: Historical Market Conditions

In this scenario, we’ll explore a housing market where the real estate values remain stable, and the interest rate is at a historical low of 3.8%. For a $600,000 home (which is within the average range in many markets), the monthly mortgage payment would be approximately $2,525.

Scenario 2: Anticipating a Market Correction

Now, let’s fast forward to a hypothetical scenario in 2022 or 2023 where there’s a 20% decrease in real estate values. Assuming the home price drops to $480,000 and the interest rate increases to 6.8%, the monthly payment surprisingly goes up to $2,681. Despite the lower home price, the higher interest rate offsets any potential affordability gain.

Debunking the Affordability Myth

This analysis challenges the conventional wisdom that a market correction, marked by lower home prices, inherently translates to increased affordability. The intricate relationship between interest rates and home prices plays a crucial role. Even a significant drop in home values might not result in improved affordability if interest rates rise concurrently.

Considering Alternative Scenarios

To provide a more comprehensive view, let’s explore other scenarios. What if the market correction is only 10%, bringing the home price down to $540,000? In this case, with an interest rate of 6.8%, the monthly payment is $3,600 – highlighting that affordability may not significantly change even with a less severe market correction.

Factors Beyond Interest Rates

It’s essential to recognize that home affordability isn’t solely dependent on interest rates. Other factors such as insurance, taxes, homeowner association fees, and maintenance costs contribute to the overall financial commitment of homeownership. The reality is that these additional costs are likely to increase over time, influencing the true affordability of a property.

A Complex Affordability Equation

The relationship between interest rates, home prices, and affordability is a complex equation. While lower interest rates may traditionally boost affordability, other market dynamics and additional costs must be considered. As prospective homebuyers navigate the ever-changing real estate landscape, understanding the intricacies of this relationship becomes paramount. The assumption that lower home prices always equate to increased affordability may not hold true when interest rates come into play.

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