Is this a good time to buy a house? Many Realtors are reporting that buyers are wondering how much their buying power is affected by rising interest rates. What should you tell them?

Interest rates impact the amount the buyer can borrow, but not the ability to buy a home. Low interest rates mean greater affordability, but rising interest rates don't necessarily mean that buyers have missed the opportunity to buy.

The 5.12 percent interest rates that we found in June were very short-lived, says Iverson Moore, spokesperson for the National Association of Realtors, and unlikely to return.

"If interest rates have gone up a full percentage point," says Moore, "that still means that the average for the year is still well below that of last year, when we had our greatest number of housing sales ever. Conditions are still at 30-year lows."

What that means that we are still at an all-time high in affordability, and that people can afford much more home than they may realize.

"In most cases, people can afford four times more house than their income," says Moore. "Today, most buyers are only buying three times their income."

Here's how it works, but first a reality check.

"Interest rates are at about 6.4 percent (30-year fixed rate mortgage)," explains Moore. "You have to go back to the 1960s to find rates that good. The market went down artificially in June because people were overreacting to Greenspan's concerns about deflation. That allowed the rates to go low. While you hate to miss the bottom of the market, keep in mind that you have affordability conditions near 30-year highs. Interest rates have gyrated, but homebuying isn't going to fall off a cliff."

He continues, "The typical homebuyer can buy a house four times their income and in reality they are spending three times their income. They are underbuying."

The NAR does a quarterly affordability study, and in August, the organization put out the second quarter report. In it is a startling revelation.

"Homebuyers have 143 percent of what they need to buy a median home," says Moore. "The national median price is $169,000. Buyers can afford to buy a $242,000 property. This is a relative index of what amount of money buyers need to buy homes."

The Index fluctuates.

"In July, buyers had 136.5 percent of what they needed to buy homes, when home prices hit a record of $182,100," points out Moore. "The median income household could afford $248,600. We projected a $53,500 difference on affordability because of interest rates. That meant that the median income household could afford 4.6 times their income in housing. They paid 3.4 their income when they could afford 4.6. That's a real spike, on a quarterly basis."

While the NAR is expecting interest rates to continue to bounce around, they will remain in a narrow range.

"We are expecting it to stay pretty even at under 6.5 percent," says Moore.

The fact that historically, affordability is at a high level may offer little consolation to buyers who are finding that with every one percent hike in interest rates that they are able to buy about 10 percent less house.

Remind these buyers that today's loan programs more than make up for such losses. Homebuyers can buy with zero or little down, make use of hybrid loans that combine the benefits of adjustable and fixed rates, and in many cases, pay only interest for part of the duration of their mortgages.

And in most cases, ten percent less house may not be as significant as the buyer thinks. Show your buyers some comparables, and let them be the judge.

Published: September 10, 2003

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