The rise and fall of interest rates do not correlate strongly with the rise and fall of home prices, but buyers should have access to long term data that allows them to put current interests rates and their impact on purchasing power into perspective.
The chart below summarizes Freddie Mac data from 1972 to date on average interest rates for 15 year and 30 year loans. Most younger buyers today will be shocked to see the peak of interest rates on a 30 year loan in the early 1980’s at over 16%. Frankly, many buyers today are shocked to learn that interest rates of 7-8% in the 1990s were assumed to represent a base below which rates could never drop. In the early 2000s, however, they dropped and held at about 6% and are now between 3.5% and 4%, really the lowest that long terms mortgage rates have been since the development of modern mortgages following the Depression.
Interest Rates: 1972 to Date
To make this more concrete for the buyer, it helps to translate interest rates into monthly payments. In the chart below, we track the impact these interest rates have had on how much a buyer can borrow given a $2000 monthly payment (ignoring taxes and insurance costs). Moving the 16% peak to today’s rates, a $2000 monthly payment shifts from covering the costs of a $150,000 loan to covering a loan just short of $450,000. But even comparing the “great rates” of 1993 with those of today, the buyers borrowing power shifts from about $250,000 to $450,000…an 80% increase in what the buyer can afford for the same monthly payment.
Borrowing Power: Loan Amount for $2000 Monthly Payment
These data are no less striking is presented in terms of what you’d have to pay monthly on a fully amortized $300,000 loan. That data is presented in the following chart. What is most striking to me here is that the monthly payment on a 15 year loan from 2013 to 2016 is nearly identical to what it would have been on a 30 year loan between 1993 and 2000. That is, you’d pay off that loan in 1/2 the time. Ignoring price increases, you’d buy your home at half price.
Cost of Loan: Monthly Payment on a $300,000 Loan