[[[Check out my blog where I did the math and discovered (much to my surprise as well) that the higher the interest rate climbs the more you wind up paying for your home - even with a lower purchase price. Here is the article (incidentally, it was picked up by some of the leading Real Estate and Mortgage information sites on the Net.
1. If you check the bankrate.com mortgage history chart, you would see that in the recent 5 year history the 30yr fixed has been limited to the following range: 4.9% - 6.4% (actually, the range is tighter than that). Also, if you exclude the outliers on both end, and thereby exclude about 5% of the observatings, that range is further reduced to 5.20% to 6.20%.
(obviously, that chart has assumptions -> excellent FICO, 20% down, under 417K, so that the loan terms are best possible).
Based on the trailing 5-year history, a rate increase of 2% while not impossible, is outright unlikely.
You can go to mortgage-x and do analysis of longer history, but you would be crossing decades and periods of economic expansion / recession, as well as ultra-high inflation.
2. Even if rates increased, that is simply going to make a down-ward pressure on the prices. Why? For the exact same reasons you provide in your analysis: affordability in the form of monthly payment. Buyers can afford house price X based on what they can pay per month, Y. Assuming Y does not change, If mortgage rate goes up, buyer can afford house price smaller than X. There goes the pressure down on the prices,
3. Your analysis is based on holding the house and the mortgage 30 years. Try to choose a more reasonable holding period, that is inline with averages actually observed.
4. Let's consider two buyers. Buyer A bought high, with low mortgage rate. Buyer B waited, and bought lower with high mortgage rate.
A, paid $400K, mortgage 5%, in 2008, payment $2147 / mo.
B, paid $320K, mortgage 6%, in 2009 (price drop 20%, rate increase 20%), $2398.
(see, I have even chosen the example to be consistent with what you wrote in your article, i.e. buyer B is paying MORE per month).
Assume prices do not further decrease after 2009, increasing very slowly for a while (optimistic, I know :)) ).
- (i) If A has to sell, A is screwed. If B has to sell, no problem - exactly the point made by "Realist In Tâ€¦ " below,
- (ii) If, for some reason, rates go down, say to 4.5% (unbelievable, I know), gues who can re-finance and who can NOT? Even though not wiped out, A's equity is so low, that in order to refinance, A might have to bring 20% to the table,
- (iii) If, rates don't change, or for some reason, go up again say, 7%, what is different between the two buyers? Well, A is sitting on a $80K loss. B is paying $251 per month more than A.
Would you rather be A or B?? My calculator says that it would take 318 months (that's 26 years, BTW) for the extra payments made by B equal the loss experienced by A.
I say, in all three situations, I'd rather be B.
Moral of the story:
Lower basis (purchase cost) of an asset trumps getting a lower rate.
End of story, right?
No. No story is complete without a good P.S.
P.S. Next time doing price / loan rate analysis, please be informed that a loan at $450K is a JUMBO loan and "enjoys" an extra markup. In other words, comparing loans at $450K and $400K is like comparing apples to, oh, maybe frogs. But hey, you picked the numbers, right? So the buyer taking a $450K loan has a handicap equal to the markup on the JUMBO loans over the conforming, under-$417K loans -- currently at a whopping 85 basis points.
Anyway, just wanted to mention this in case you wanted to edit your highly acclaimed blog to at least compare oranges to oranges.