Friday, October 20, 2023

How has Buying Power Diminished in the Current Economic Climate?

The real estate market has undoubtedly softened up under the burden of higher interest rates. Locally interest rates for 30 year conventional mortgages are hovering in the low 8s. These are rates we haven't seen since the turn of the 21st Century. Of course old guys like me remember the late 70s and early 80s when mortgage rates were close to 20%! Let's hop the knuckleheads in Washington DC don't let that happen again.

Higher interest rates tend to rob buyers of purchasing power. This his typically the hardest pill to swallow. How much has a buyers purchasing power actually eroded since the October of 2020 when when most borrowers could get a loan in the low 5s. For the sake of easy math I'll compare 2020 prices and 5% mortgage rate to 2023 prices and 8% mortgage rates.

October 2020 the median priced home in Vancouver was about $372,000 and rates at 5% were possible although most people were a tad above that. With 20% down ($74,400) a buyer would borrow $297,600 @ 5% for a principle and interest payment of $1,598. Of course loan payments often include taxes and insurance so the real total payment would be higher but this is a comparison of the loan costs and housing prices. 

October 2023 the median price in Vancouver has been flat over the last year and remains at about $490,000 and rates a bit above 8%. So our buyer has to come up with 20% down ($98,000) and borrows $392,000 @ 8% for a principle and interest payment of $2,876.

That is a striking difference of nearly 90%. But a few other things have happened that at least slow the bleeding a bit. In 2020 the median family income in Clark County, WA was $77,184 today it is estimated at $91,000. Well the cost of buying a house has definitely outstripped the increase in income, but the real world difference is a little closer than just the payment suggests.

October 2020 median family earner buys median priced house and payment is 26% of gross income. October 2023 it is 38%. In order for parity where today's house only costs 26% of gross, current rates would need to be 4.5%. If housing prices remain steady and incomes continue to climb, then by 2027 we would be back where we were in 2020 as far as debt to income ratios are concerned.

I believe the Fed over reached by allowing rates to climb above 8%. A healthy number that would have slowed the economy enough to reduce inflation but not stagnate the real estate market, would have been 7%. Rod for Fed Chair ;) 

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