Market Affordability – The Time is NOW

A quick update on the market and its affordability.

I don’t know about you, but I love numbers. In the real estate business all kinds of numbers are critical. $ per sq ft, tax rates, HOA fees, lot sizes, travel distance to work, room dimensions, etc. But without question the most important number to just about anyone is the interest rate they will pay on their loan. In today’s market most buyers are using FHA financing to purchase their home. So I took a quick look at some FHA history to help give buyers a perspective on where we are right now. I used data from www.hud.gov to get my stats. They provide a really nice excel spreadsheet that you can download yourself. Here is what I found.

There are 18 full years of data on that spreadsheet. The average interest rate for all of those years was 6.59%. The high for any year was in 1992 at 7.85%. The low yearly average happened two times, once in 2005 and again in 2009 at 5.63%. Rates for 2010 so far are averaging 5.31%, with the lowest month ever recorded being the most recent month of data in the spreadsheet in April of 2010 at 5.21%.

So what does all this mean? What it tells me is that payments on fixed rate FHA loans are a steal by historical standards and that buyers have an opportunity to purchase a lot more home than they could at any time in the 18 history of this data. Here is an example. If you were to purchase a $150,000 home today with the minimum 3.5% down payment and the 5.21% rate from April 2010 your Principal and Interest Payment would be about $810 per month (not including insurance, MIP, HOA or taxes). Using the average rate from the last 18 years that same $150,000 home would have a monthly payment for principal and interest of $940. Over the life of a 30 year loan buying at today’s interest rate would save you (360*130) or $46,800.

Looking at it another way, if all you could afford was a payment of $810 a month for principal and interest, buying that home today gets you a $150,000 property. If however interest rates were to move back to the 18 year average of 6.59% you would only be able to purchase a $129,000 home with that same $810 per month.

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