Interest Rate Stays Low

Based on Primary Mortgage Market Survey released by Freddie Mac last week, the average interest rate for a 30-year fixed rate mortgage remained below 5.0% for the fifth week in a row. The average interest rate for the week of April 16, 2009 was 4.82% with 0.6 points for "fees and points" and is the second lowest weekly rate ever; following 4.78% during the week of April 2, 2009.

California Association of Realtors® "Housing Affordability Index - First Time Buyer" reached a recent high of 46 for the Los Angeles region for the 4th quarter (Oct-Nov-Dec) of 2008. That means 46% of house holds can afford to buy an entry level home in the Los Angeles region. This is at an affordability level last seen in 2nd quarter (Apr-May-June) of 2003. Affordability index largely takes in median housing price and prevailing interest rate to arrive at the index number. The high affordability index shows that it is as good time to buy right now as it was back in 2003.

People tend to be focused on house price, but interest rate is just as, if not more, important. Let's take an example of a $400,000 house you buy with 20% down payment ($80,000) and a 5% 30-year fixed rate loan (loan amount is $320,000), your monthly mortgage payment will be $1,717. If the mortage rate increases just 1 percentage point to 6%, the payment will increase by about $200 to $1,918. So, think $200 change for every 1 percentage point change in interest rate.

On the other hand let's say you put $80,000 down payment on a house and get a 5% 30-year fixed rate loan. For a house priced at $400,000, your monthly payment will again be $1,717. If the house price falls to $380,000 (still with $80,000 down payment) your monthly payment will go down around $100 to $1,610. If the house price falls to $360,000 (still with $80,000 down payment) your monthly payment will go down around another $100 to $1,503. So, think roughly $100 for every $20,000 change in price. You can do your own calculation from the Mortgage Calculator here to check my math.

So, in this example, if the house price falls another 10% to $360,000, you will save around $200 monthly. But, if the interest rate increases 1 percentage point to 6%, your monthly payment will increase around $200. In a strong housing market like in the Los Angeles County South Bay area where there are already signs of housing price bottoming out in this price range, which do you think is more likely to happen? Prices falling another 10% or interest rate increasing by 1 percentage point before December 1, 2009 (end of $8,000 Federal Tax Credit Benefit)? I'm not a gambling man, but I'd say the safe bet is to bet on the interest rate rising.

Price direction has a psychological impact on sellers. If the general trend is falling price, sellers are generally willing to negotiate a discount--since if they don't sell today, they may have to sell at an even lower price at a later date. If the general trend is increasing price, the seller will wait for the buyer to come up to their price. Given that the current price direction is still falling, the circumstances are better for negotiating a discount right now.

Price direction also has a psychological impact on buyers. Buyers tend to make low-ball offer that is significantly discounted from the asking price with an attitude of "if I can get it at a real low price, that's great. If I can't, I'll just move on to the next opportunity." Sellers, unless they are desperate for one reason or another, won't be willing to accept an offer that is significantly lower than the market value. This creates a big gap between the seller and the buyer and typically results in a failed transaction....

Considering the already good opportunity to buy a house now with the declining price trend, there is an opportunity to buy a house at an unprecedented value today.

James

http://jamesmakishima.com/

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