Maybe prices are softer than we thought? By John Burns:
In the last 15 years, home prices have grown 29% faster than incomes, primarily due to falling mortgage rates. Since the monthly payment determines what most buyers can afford to pay for a house, we thought we would show you the powerful stimulus that lower interest rates have on home price appreciation.
A typical family earning $60,000 per year can afford a mortgage payment of $1,800 per month, which qualified them for a $245,000 mortgage in the year 2000 when mortgage rates were 8%—– and qualifies them for $377,000 when rates are 4.0%. In other words, each 1.0% drop in interest rates in the last 15 years has allowed home sellers to raise price 12%+/-.
Since last March, rates have fallen 0.7%, a 9% stimulus to home prices. For all but the most affluent home buyers, payment trumps price, and sellers now have the ability to raise prices again.
Price drives profit, which is why the industry always talks about price. However, payment drives price. In addition to talking about price, please always calculate the payment. It will help you stay in touch with the consumer.
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IMO we will not see 8% rates again for a very long time for those very reasons.
I think this is the biggest reason future appreciation will likely be much more muted than everyone is expecting. If incomes start rising significantly then rates are going to rise significantly because nobody intentionally lends at a loss. Therefore that additional income is going to have to be spent on the higher interest rate rather than the higher home price. I do think rates will likely remain low but I also expect wage growth and home price appreciation to remain low. At least much lower than 3-5 annual appreciation that everyone is expecting to make their home 20%+ more valuable 5 years down the road. Obviously with any small submarket YMMV.
Over simplified calculation that assumes 100% LTV and ignores the impact of mortgage impound accounts (taxes and insurance) which increase with home prices but do not change with mortgage interest rates. I ran the calculations assuming 20% down and monthly impound payments of .125% of purchase price (1.5% annual / 12 months) and came to the conclusion (for a $60K buyer and 36% DTI cap) that each 1.0% drop in interest rates increases purchase power by approximately 9%+/-. 3 percentage points (or 33%) less impact than what Mr. Burns claims in his over simplified example.
Close enough. The point was that the market should be hotter than it is.
Slow down of buyers from china?