Mortgage Rates Are the Driving Force of Home Sales

Not Too Difficult to Figure Out

Just about every day there is an article about the housing market. The talk is there are fewer and fewer homes on the market. It is pretty basic what is driving this issue - Mortgage Rates.

Previously the Federal Government lowered the mortgage rates to around 3.0%, which motivated people to sell and/or refinance. Home Owners were actively selling and buyers were often forced to offer more than asking price. It even got so crazy that buyers were waving home inspections. The real estate agents could not have been happier because all they had to do was list the property for sale. Not exactly a lot of effort.

The banks and mortgage companies were flooded with requests. This combination pushed the average price of a home to excessive highs…too the point of being ridiculous. However, as they say the price is what the market will bear.

The real estate agents and banks had a false sense of security and got to the point they believed they were really good at their jobs. Now it is a different story with so little inventory and high interest rates. The challenge is they have no control of the critical factors that drive their business.

Below are a few charts that reflect the monthly payments at different interest rates for a 30 year mortgage. Just to make it a simple comparison we used a selling price of $1,000,000 and putting down 10% deposit or $100,000. This would leave a mortgage of $900,000.

At 3.5% mortgage rate for 30 years translates to a monthly payment of $4,041. If you borrowed the same amount at the 7.5% mortgage rate, it would translate to a monthly payment of $6,293. This is an increase of $2,252 per month or a 56% increase. Keep in mind, this does not include real estate taxes or operating costs.

Home owners that have low mortgage rates are not willing to lose the rate. Plus with so few homes on the market the home prices are still inflated. With the higher interest rates, potential buyers may not be qualified.

The real estate market will need to correct itself by lower prices. This may be the case in some cities, but in others the correction will not drop enough. It could very well get ugly as the United States economy is driven by home sales.