How Rates Affect Your Buying Power

Over the past decade, interest rates have been historically low, but are now starting to build back up. Right now, the interest rate for an FHA loan is at about 3.625%, which is a bit up from January, and significantly higher than last year.

The difference between interest rates

So, how does an increasing interest rate affect your buying power?  Let’s consider how much home you can afford at different interest rates

In November of 2016, the 30-year FHA rate was at 3.25%. At this rate, if you wanted to buy a house, and pay no more than $1,200 a month for your mortgage (including taxes and insurance), you would have been able to afford a home worth about $218,000.

Now consider an interest rate of 3.75%, which about what you can expect now (depending on your credit score).  The amount of home that you would be able to afford at $1,200 per month becomes substantially reduced to $205,000.

That is a difference in buying power of $13,000.  In other words, the amount of home you can afford dropped by $13,000 with an interest rate increase of just 0.5%.

So, are higher interest rates “bad”?

Not necessarily, since higher interest rates also mean that you will earn more on your interest-bearing accounts (savings, money-market, investments, etc.).  Higher interest rates also normally indicate a stronger economy, so your other assets (home, 401K, etc.) will be increasing in value faster than when rates were lower.

However, a higher interest rate means that buying a home will be more costly.

What this means for buyers

A 3.625% is still a phenomenally low interest rate, but rates are likely to steadily increase over time and the economy continues to improve.  Additionally, significant increase in demand for housing in Utah is driving up home prices.  Before you put an offer on a house, set a monthly payment at which you are comfortable, and then determine how much you can offer, based on the current interest rates.  If you’ve been on the fence for a while, it may be wise to act now before higher interest rates/home values price you out of the market.

So, jump on the opportunity while the interest rates are still low, and give us a call for a free consultation to see how much home you can afford right now. 

A Growing Utah: Everyone wants to live here (and buy our houses!)

A review of some key reports from 2016 yields some revealing information about how much Utah is growing, and what that’s doing to the real estate market.

Fastest Growing State

The US Census Bureau declared Utah the fastest growing state in the country, with a 2% population increase in 2016 (reference this article: http://www.builderonline.com/design/consumer-trends/census-utah-leads-all-states-in-growth-in-2016_o).  Compare this to the national average of only 0.7%.  The country in general is seeing a migration from the northeast (avoiding extremely high tax rates/costs of living) to states in the south, west, and southwest, and some of that population growth can be attributed to birthrate (we Utahns like to have babies!), but a large driver seems to be Utah’s fast-growing high-tech industry (the “Silicon Slopes”).  Having many Utah cities (Orem, Provo, Salt Lake) being listed at the top of many “Best Places to Live” surveys helps to!

…And People Need a Place to Live!

In 2016, home values increased 7.1% and are expected to rise another 5% in 2017.  Compare that to the national average of 4% (the rate of real estate appreciation nationwide).  Salt Lake City, Provo, and Ogden are all “sellers’ markets”, with very strong buyer demand, but are still considered affordable areas.

What Does this Mean for You?

If you’ve owned a home for the last few years, you likely have equity.  If you’re thinking about “trading up”, that equity can cover the down payment for your new home (and then some!).  Be prepared, though, to compete with multiple offers, and low-balling will probably get you nowhere (unless the home is significantly over-priced).  

Recent Home Value Changes: Utah vs. Everyone Else

Most everyone agrees that the real estate “rebound” is in full swing, and has been for some time.  But, as the experts say, real estate is local, and just as the bust affected each region differently, so has the rebound.

The chart below represents how home prices have changed over the last 3 years, comparing Utah to the rest of the country.

What does this mean?

Here are several takeaways from this information:

·         Nationally, rates of home appreciation have returned to close to normal – The 100-yr average of real estate appreciation is 3.5%.  The country is currently just under 4%, and while some areas are still exploding (parts of California, Florida, etc.), overall, things have “calmed down”.

·         Utah is still charging hard – Utah is experiencing real growth (people are moving to the state and those that are here are having kids!).  There is a real demand for housing and that demand continues to drive up the price of real estate.

·         What happened in 2014? – The drop in home values in 2014 is surprising.  This could be due to a simple correction (of overly-optimistic pricing in previous years), timing of new homes being built, etc.  Most importantly, though real estate tends to increase in value, it’s not an unwavering trend (and this is just a 3-yr sample).

Not all of Utah is created equal

As a further example of real estate is local, below is the same chart, comparing just Salt Lake City, Provo, and Ogden:

Key Takeaways:

·         Along the Wasatch Front, Utah County continues to outpace other counties – Though the rate of growth has evened out, Utah county continues to be a hotbed for tech companies and other startups.

·         Salt Lake faltered, but came roaring back – With almost a 9% drop in home values in 2014, Salt Lake saw the steepest rebound in 2015, proof that the most populated city is still a favored destination.

·         Ogden is the least volatile – Home prices remain affordable, even though Ogden has had the highest average 3-yr rate of growth amongst these 3 cities.

In a nutshell:

Utah’s true growth makes its real estate a solid long-term investment.  But, that also means that if you’re thinking about buying, homes will likely be 7% more expensive a year from now, so act fast (if prudent)!