The Expert Podcast

So our lower interest rates going to help affordability of a home. So let's take a look at a mortgage calculator. Here is the Google mortgage calculator and what we plugged in is a loan amount of 540,000, 30-year fixed at 3.8 percent, which is where the rate was maybe a year, year and a half ago. So if you're looking at, you know, a 600,000 house, which is, you know, above average but it's a price that you'll find in many markets, say five, six, seven hundred thousand, you're gonna have a mortgage payment of two thousand five hundred twenty-five.

Twenty-five hundred bucks roughly for a 540 loan amount at 3.8 interest. Now remember that's a loan amount after a down payment, so if you had a six hundred thousand dollar house or a 580 or, um, yeah 600, 650 house or 680 house minus your down payment, you might be financing let's say 540. Put you at 2500.

So now let's fast forward to 2022, 2023. If the real estate market goes down 20 percent, which some people are calling for a 20 percent crash in real estate values, that would be a pretty big drop. But let's just assume it goes down 20 percent. Let's bring it down to, I don't know, let's say 410,000.

Okay, and at the same time your interest rate is no longer 3.8, let's call it 6.8. It's probably going to go higher than that. Well, look at your payment — it actually went up to 2,681. It went up over a hundred dollars a month. The house went down 100 grand, your rate went up three points, and your monthly payment went up.

So did that help affordability? Did that 20% crash in values help affordability of the house? It actually made it worse because in order to get that crash in the price, the rate had to go up.

Now you can make the argument, "Well, I'll buy the house at 410, interest rate is 6.8, maybe later I could refinance and get a mortgage lower." Maybe you can, but that's assuming rates go down. We've looked at other videos about how the historical mortgage rates — 6.8% is actually low historically. You go back 30, 40 years and rates were 8, 9, 10, over 10 percent for a decade back in the late 70s, early 80s. So you may not be able to refinance.

In fact, it's very likely that at some point in 2023 the rates might be approaching 10 percent. So even if you plug in 8.8, you're at a monthly payment of 3,249 if prices go down 20%.

What if they only go down 10? We'll take that 540 and let's call it 460 for your price. Now you're at 3,600.

So affordability may not change much if the housing market even crashes 20% because the rates are going to be higher. That's not even counting the fact that insurance is going to be higher, taxes will be higher, Homeowner Association fees will be higher, maintenance fees, repairs all be higher.

The mortgage payment itself is probably going to be, net net, higher for the same house as it was two or three years ago. So affordability may not be that much easier to accomplish with lower prices if it means higher rates — if it means that the lower price is required to have the rates jump up to depress that market.

In fact, one of the things that could hold back the market from going down is when rates go up, people still need to buy a house. So the rate and price relationship might not be as tied together as it once was because more people need homes now than they did even five or ten years ago.