For the 80 percent of home buyers who need a mortgage to buy a home, the two major factors that determine affordability are mortgage interest rates and house prices. It appears that many buyers have been waiting for home prices to fall further while hoping that mortgage interest rates will remain at their current lows hovering around 5%.
The key catalyst for interest rates in 2010 will be the end of a Federal Reserve program that buys a sizable chunk of mortgage-backed securities issued by firms such as Fannie Mae and Freddie Mac. That program succeeded in immediately pushing mortgage rates well below the 6 percent mark when it was announced in 2008.
But the Fed has committed to winding down the program by March. The deputy chief economist at Freddie Mac said interest rates are bound to rise to 6 percent by the end of 2010 because private buyers will demand a higher rate of return on the securities than the Fed did. Lenders will have to raise the rates they charge to home buyers in order to make that happen.
According to the Federal Housing Finance Agency, the average purchase price of homes in November 2009 was $247,300. The average loan amount was $182,000 or 73.6% of the purchase price and the average interest rate was 5.09%. As you can see from the table below, a one-quarter percentage point change in mortgage interest rates has about the same impact on affordability for the average priced home as a 2% change in the purchase price or a 2.7% change in the loan amount.
Chuck Miller GMB CGB CGP MIRM CMP MCSP CSP
President / Builder – Chuck Miller Construction Inc.