Interest Rates – Westchester NY Home Buyers Ignore Them At Their Peril

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Know your numbers - the role of interest rates

Understanding what numbers can and can't do

This post is being written because I see at least locally, many home buyers are making some very big mistakes right now.

Home Buyers: Please listen up  – this can save you thousands of dollars:

Right now buyer’s think that they are in the cat-bird’s seat.  The general market stats indicate that they have plenty of choices and with that type of selection apparently available – it is easy to get a bit too cocky.    Time stretches luxuriously before buyers – or so they think.   Since there is deflationary pressure in many markets right now – there is a tremendous temptation to happily walk away from a great offer  or to counter with a real low-ball.  After all, the house will still be around next month -and because of the magic of the buyers market – by then the seller will be begging them to buy and the buyer can name all terms their little hearts desire.

Word to the wise, hubris is a dangerous thing; it can come back to bite you.

Eyes on the Prize:

To most buyers this means the house of their dreams at a low (sometimes ridiculous) sticker price.  The trouble is they are ONLY looking at the sticker price.

“Hogs Get Slaughtered”  (Jim Cramer – Mad Money):

Jim Cramer has a saying on his show “Mad Money” which is “hogs get slaughtered.”   That is a great metaphor for this buyers market.  Its past time to stop the madness and put the green-eyed monster on hold.  Otherwise you could lose – big time.

How can buyers lose in this market?

By letting greed and the endless quest for “more ” get in the way of making a sound purchase while interest rates are low – that’s how.  Buyers have been blithely  ignoring the big wild card in this market:  Interest rates.  But in so doing  they are counting on  RECORD LOW INTEREST RATES remaining stable. Since interest rates have a nasty habit of rising unexpectedly – that’s like sitting on a keg of dynamite with a lit match.  Once interest rates go up, they are unlikely to come down again to present levels since the rates we are enjoying right now are quite literally unprecedented.  If you are ignoring interest rates, simply  assuming that low rates will always be there for you  then you are playing with fire.

Interest rates are a true wild card to Housing Affordability:

Buyers have become very spoiled by extremely low interest rates.  These interest rates are pushing affordability to levels exceeding the depths of the previous housing recession of the 1990s.  Affordability is at about a 15 year high.
But interest rates are way below historical norms and when they adjust, they tend to adjust quickly and dramatically.  Below is a chart of median interest rates over the past 30 years.  In only 4 of those 40 years did median  rates  fall below 6% which is where they are right now.  For 15 of those 40 years rates were above 9%.  These super low rates pushing below 5% haven’t been seen since before Eisenhower was POTUS.  Given that history – how long can a good thing like this possibly last?   Not that long.

History of Interest Rates

Turning Eyes on the Interest Rate Prize:

Hopefully, interest rates will then hover around 6-8%.  However, if you don’t think that will impact your purchasing plans – here is a chart that shows you just what will happen.  I picked a mortgage of $300,000 simply because that is a good loan amount for an entry level buyer.  I  am not a lender at all.  So the chart is somewhat quick and dirty – I plugged in a stand mortgage calculator and rounded the results.

I used 4.5% as the base on a standard $300,000  30 year loan.  An increase of interest rates from 4.5  to 6% would cost buyers $3336 more a year.  At 7%, it would cost buyers $5712 a year more and at 8% a whopping $8172.   I don’t know about you, but if I were in the market for a home, that would give me pause. Over 30 years this could cost homeowners between $100,000-$245,000.  That’s not chump change and it is money that could have been put towards their dream house.

Interest Payments on 30 Year Loans

The Bank Could Easily Say “NO!”

Even if you wanted to pay the extra money – the bank probably wouldn’t let you. They base their ability to lend on your income and so as interest rates rise – your purchasing power goes down.  If interest rates rise from 4.5 -6%  on buyers will lose over $46,000 o f purchasing power .  At 7% there is a loss of over $70k of lending power – something close to 25%. At 8% lending power decrease in excess of 30%.

Time to get realistic:

Listen Buyers –  a 1% increase in interest rates corresponds roughly to a 10% decrease in housing prices.  Do you really want to play games with that?   For Westchester NY buyers – I know you are disappointed.  The hype in the media told you that you could have almost anything for a song.  But New York marches to the beat of its own drummer.  Even if New York devolves from the biggest financial capital of the world over the next few years – it will still be the financial capital of the United States.  That fact makes the area pricey. This market is just 30 minutes from midtown Manhattan.  It always has been expensive and it always will be. it creates a relative price stability that other parts of the nation don’t enjoy.  Nevertheless, there has been a major price adjustment – so you can buy in at levels not seen in this century.

Further Reading:

Dear Buyer…Don’t Snooze – because you will lose…

© 2010 – Ruthmarie G. Hicks – – All rights reserved.

Please feel free to contact me anytime to request additional information or to set up an appointment so we can explore your listing or purchasing needs. I am easy to reach by phone, text or email. Or, if you just want to continue your search online, the links below will help you get started.

Phone/Text: 914-374-5529


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