Rising Rates

Interest rates are on the rise, which made the front page of today's (2/11/11) Wall Street Journal. For the first time in months, the interest rate on 30-year fixed mortgages has climbed over 5% to 5.05%, according to a survey conducted by Freddie Mac. Compare this rate to the historic low of 4.17% approximately three months ago. I found the article to be particularly helpful as it puts what seem to be abstract numbers into context:

In general terms, an increase of 1% in the interest rate raises home purchase expenses by roughly 10% for the average buyer. Assuming a 10% down payment, an annual household income of $84,000 at a rate of 4.5% will qualify a buyer for a 30-year fixed mortgage of approximately $400,000. If the rate increases to 5.5%, the buyer's income will need to increase to $92,000 in order to service that same debt.

In my experience, buyers tend to place less significance on interest rates than on prices. While both are important, keep in mind that the longer you intend to own a home, the more important the interest rate becomes in relation to price. With that said, rates are still at historic lows and the convergence of low home prices and low interest rates is unusual. Generally speaking, when rates are low, prices are high. Normally, when rates increase, prices decrease; however, I do not see much room for prices to decrease from current levels. Further, there is a saying that trying to time the bottom in any market is like trying to catch a falling knife! Put another way, the time to buy is now.

Anecdotally, as I am writing this, I have CNBC on in the background. They just posted today's poll question. The question is whether 6% interest rates will keep you from purchasing your dream home...