When it comes to purchasing a home in our Chicagoland market, when you buy can often be as important as what you’re buying. After all, no one wants to buy a home right at the top of the market when prices are cresting, or take out a mortgage right before a drop in interest rates.
In real estate, maximizing your “purchasing power” — or the value of the home you can buy with each dollar you have to invest — is crucial when undertaking the largest investment that many of us will ever make.
For homebuyers, purchasing power is simply a measure of how much home a given home purchaser can afford. Given that most buyers do not pay cash for their homes and instead make monthly payments on a mortgage, homebuyer purchasing power generally will involve multiple variables working in tandem — including the sales price of the property, as well as changing mortgage interest rates.
How Do Interest Rates Affect Homebuyer Purchasing Power?
For most buyers, mortgage interest rates are a major factor in determining their purchasing power. Simply put, the less expensive it is to borrow money, the more money a buyer can reasonably expect to repay each month.
For instance, let’s consider a hypothetical buyer who can put down 10 percent on a $350,000 dollar home. Assuming a 30-year fixed mortgage with an interest rate of three percent, monthly principal and interest payments would come in around $1,328. If interest rates were to rise, even if the home did not appreciate in value, the buyer’s purchasing power would still diminish. For example, if rates climbed to just 3.6 percent within a year, that same buyer’s monthly payments would come to roughly $1,432 — an extra $104 per month. Over time, that amounts to an extra $1,248 a year, and an additional $37,440 over the life of the loan.
Where Are Interest Rates Headed In 2022?
Knowing the effect of interest rates on purchasing power, one of the most important factors prospective buyers will want to consider in determining when to buy is to evaluate where interest rates are going over the next year or two.
2021 has seen mortgage interest rates continue to sit near historical lows around three percent. According to data compiled by Freddie Mac, from January to June, rates increased slightly, with 30-year fixed rates increasing from around 2.65% to a high of 3.02% by the end of June. Rates dipped slightly in July, settling at 2.78% as of July 22, 2021.
Most experts expect rates to climb in the third and fourth quarters of 2021 and into 2022. The COVID-19 pandemic exerted a deflationary impact on prices. As the recovery moves forward, it is likely that interest rates will begin to climb.
According to Freddie Mac’s market outlook, 2022 is likely to begin with rates around 3.5% and end with average rates around 3.8%. Fannie Mae projects similar rate increases, with 2022 beginning with interest rates around 3.2% and ending around 3.3%. The rate of increase is likely to depend on the strength of the economic recovery, with a stronger economy leading to a larger hike in rates.
The Effect Of Home Prices On Purchasing Power
Besides interest rates, the most significant factor affecting a buyer’s purchasing power is home price. In a market where the average price of housing is lower, a buyer can expect “more house” — that is, more square footage and features — for every dollar. As prices go up, your budget might not stretch as far.
For instance, let’s consider that same $350,000 property with 10 percent down. If a buyer were to act now, a 10 percent downpayment would require $35,000, with the buyer borrowing $315,000. If the price of that home were to appreciate by, say, seven percent in one year, that same property would cost $374,500. That requires a larger downpayment of $37,450, with the buyer having to borrow substantially more, at roughly $337,050.
As a result, in considering whether and when to buy, it helps to know whether prices are expected to go up or down in your market.
Nationwide, the median sales price was up by 23.4 percent year over year as of June 2021, according to data from the National Association of REALTORS®. According to Illinois REALTORS®, most experts expect the red-hot pace of sales to level off somewhat, although prices are projected to continue rising throughout the next year.
What Does This Mean for Buyers?
With increases forecasted for both interest rates and home prices, homebuyer purchasing power is likely to decline over the next year. While many buyers don’t have the luxury of trying to “time” the market, this means that those buyers who are waiting for a calmer market may find themselves priced out of their favorite properties.
For potential buyers, this all adds up to a market forecast in which buying sooner rather than later is likely to mean gaining a substantial purchasing power advantage.
This is not, of course, a hard and fast rule. Every buyer’s situation is unique, and a number of factors — the buyer’s desired neighborhood, family or job circumstances, savings, or other lifestyle and financial considerations — will all play an enormous role in determining the ideal time to buy.
Working with an experienced real estate professional who knows your local market and has experience in a variety of circumstances is an essential part of making sure you can move forward with confidence — and ultimately secure the best deal for your goals.
When Home Means More, You Need a Team With More to Offer
Home is about so much more than just four walls. Buying or selling a home is a big deal, and with everything we’ve experienced in the last year, our homes have never been more important. That’s why your local Baird & Warner agent is with you at every step of the way, from finding the perfect home to connecting you with local experts in mortgage and title. Whether it’s the beginning of a story or the end of a chapter, we’re here to help.