Deal of the Century? Mortgage Rates Make Housing Worth a Look
August 11, 2009
The old expression that you can't turn back the clock in life is especially true when it comes to real estate. Even with the prolonged housing slump over the past couple years, aggregate real estate prices across the country are more expensive than they were at the start of this decade. However, when you throw everything into the mix, it's actually cheaper to buy a house today than it was in January of 2000.
In other words, if you have the credit history and the income to qualify for a mortgage loan, buying now is worth serious consideration. The following will spell out why.
Average housing prices have declined by nearly a third since reaching their peak in July of 2006. Even so, this only sets housing prices back to where they were in 2003. Housing was about 28% cheaper at the start of this decade.
Judging by the change in average home prices over time, a property that cost $200,000 in January of 2000 would cost $278,360 today. Based on this factor, housing would not appear to be as cheap as it was at the start of the decade. However, price is not the only factor in determining the affordability of a home.
For most people, buying a house means getting a mortgage loan, and in that case mortgage rates have a significant impact on the cost of the home. Mortgage rates are significantly cheaper today than they were in January of 2000. In late July of this year, 30-year mortgage rates were running at 5.20%; in January of 2000, those rates were at 8.21%.
It may be more difficult to qualify for a mortgage than it was at the start of the decade, but for those who do qualify, the cost of borrowing money is much cheaper now.
For some potential home buyers, this year's $8,000 tax credit can also be a significant factor in making housing more affordable. In fact, if you qualify, this tax credit can tip the scales toward making buying a home more affordable now than at the start of this century.
Adding It All Up
To account for all these factors, you would need to look at what a monthly mortgage payment would have been at January of 2000 home prices and mortgage rates, and then compare that to a mortgage payment at today's prices and rates. Then, as a final step you would have to factor in the $8,000 tax credit.
Starting with January of 2000 levels, a $200,000 home at an 8.21% mortgage rate would give you a monthly payment of $1,496.91. At today's prices, that same house would cost $278,360. That would require a much larger mortgage, but at this year's 5.20% mortgage rate, the monthly payment wouldn't be much higher -- $1,528.51.
That leaves the $8,000 tax credit. Using this tax credit to knock the mortgage on today's home down to $270,360, you would wind up with a monthly payment of $1,484.58. This is about $12 a month less than the same home would have cost you in January of 2000.
So, for housing at least, you can turn back the clock -- but only for a short while. That tax credit is temporary, and today's low mortgage rates probably are as well.
Freddie Mac • http://www.freddiemac.com/pmms/pmms30.htm
Standard and Poors • http://www2.standardandpoors.com/spf/pdf/index/CS_HomePrice_History_063055.xls
Yahoo! Real estate • http://realestate.yahoo.com/calculators/payment.html?_submit=yes&id=det03&loanAmount=270360&interestRate=5.2&termMonths=360&amortization=2&submit=Submit • http://realestate.yahoo.com/calculators/payment.html?_submit=yes&id=det03&loanAmount=200000&interestRate=8.21&termMonths=360&amortization=2&submit=Submit • http://realestate.yahoo.com/calculators/payment.html?_submit=yes&id=det03&loanAmount=278360&interestRate=5.20&termMonths=360&amortization=2&submit=Submit