How The Cost Of Money Impacts Real Estate Affordability

Mortgage interest rates have a huge impact on the affordability of homes for sale in Tallahassee, as the cost of money is just as real to most homebuyers as is the cost of the sticks, bricks, land, and labor that go into the overall cost of a home. In fact, you could argue that real estate affordability too often focuses on the price of homes, but the cost of money is a far greater factor to most homebuyers.

This is something that we have for years counseled buyers to consider during the purchase of a home in Tallahassee. Historically, more than 90% of homebuyers in Tallahassee have used financing when they bought a home, so the cost of money to the buyer should be considered just as thoroughly as the cost of the sticks, bricks, land, and labor that go into the creation of a home.

Cost Of Money Changes When Mortgage Interest Rates Change

While everybody knows that the cost of money changes as interest rates change, not many people can visualize the significance of a mortgage interest rate change. In order to better see how rate changes affect what you pay for a home, the following mortgage rate graph compares today's rate with rates that we will be seeing in the future as the economy begins to improve.

In the mortgage rate graph above, we see the staggering impact of the rise by mortgage interest rates by just a few percentage points. Considering that the average 30 year fixed interest rate over the past 50 years is close to 9%, then a "return to normal" would double the cost of money for the typical homebuyer. This is not an insignificant issue!

Each interest rate compared in the graph above is shown for four different holding periods. The average homeowner lives in their home 5 to 7 years, so the impact of rising mortgage interest rates is best seen in the blue and the red bars which measure a 5 and 10 year hold period, respectively. The orange call-out points to an increase in the cost of money from today should interest rates just return to the mid 6 percent range. Most people who have owned homes for a while will tell you that interest rates below 7% are fantastic and won't last forever.

So if you are considering whether or not to buy a home right now, and you are worried about falling home values, I would recommend that you consider how long you are likely to live in the home. If you might be moving in the next few years, renting could be the right option for you. But if you plan on living in the home for more than 5 years, you should take advantage of the low interest rates being offered today and lock into the loan as soon as possible. Any money that might be lost due to depreciating home values will certainly be gained in the savings from low mortgage interest rates.