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  • Buying Power and Interest Rates

    Monday, January 31, 2022   /   by Michael Evans

    Buying Power and Interest Rates

    I'm sitting here in my office, watching through the window as the sunshine melts the remaining snow from my car and it dawns on me...tomorrow is February. In just a couple days, Punxsutawney Phil will let us know if we're going to have an early spring, or 6 more weeks of winter. I'm personally hoping that he sees his shadow, but that's just me. Either way, as we march toward spring, the housing market will be heating up. Whether you're a buyer looking to for the perfect home, or a seller longing for a warmer climate, waiting until daffodils bloom, might negatively affect your buying power, and the seller's bottomline. 

    The difference interest rate makes.jpeg

    Take a look at the graphic above. It is straight from The Federal Home Loan Mortgage Corporation, commonly know as Freddie Mac. It shows interest rates through the years and how they affect your mortgage payment. For the sake of this conversation, it only takes into account principal and interest. Figure another $300/month for taxes. Another $100/month for insurance, and if you don't quite have enough saved for a 20% down payment, another $100/month for mortgage insurance. That's a monthly payment of around $1500. If this is the range you're comfortable with, you should be looking at houses with a max loan amount of about $225,000. As of the writing of this blog, there are 155 homes in the Pocono's that would fit within this budget, and 321 in the Lehigh Valley. As we get closer to April the number of available houses will increase, but so will another number...the interest rate. 

    In the latest statement from Federal Reserve Chairman Jerome Powell, Powell reiterated that while the economy is growing, so is inflation and to help keep the prices for other things in check, the Fed intends to raise the overnight lending rate, in March from it's current range of 0%-0.25%. There are other things at play here as well. In conjunction with an increase in interest rates, the Fed plans to slow their purchase of Mortgage Backed Securities, putting further pressure on lenders and in turn upward pressure on interest rates. The Mortgage Bankers Association, predicts an interest rate at, or near 4% sometime this year and while that's nothing like the rates of the early 2000's it does make homes slightly less affordable. 

    Let's look at our hypothetical buyer above one more time. Same $1500/month housing budget at 4% would now be looking at houses with a maximum loan amount around $218,000. Certainly not a reason for panic, but with places like CNBC and Zillow both anticipating a housing market in 2022 similar to what we've seen in an inventory starved, COVID energized market, getting your search underway sooner will likely ensure more of your hard earned money is going toward realizing the American Dream than interest rates. 

    Michael Evans
    The Peter Hewitt Team
    Keller Williams Real Estate

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