Real Estate Purchasing Power
What is purchasing power? The technical definition is the number of goods and/or services that can be purchased with a unit of currency. In the case of residential real estate where the buyer is seeking a mortgage it is the value of a home one can obtain relative to the interest rate with fixed monthly payment. In my experience representing clients in this industry 83% of all transaction involves some type of financing. Suspect this is not far from the national numbers.
There are pros and cons to using financing to make a purchase. That’s if all cash is an option but very few have the choice. Purchasing power especially in Hawaii can mean the difference from living in your dream home or having those wishes differed down the road for years.
These are unique times. Given the current state of the economy the federal reserve has kept interest rates artificially low. The primary consensus is to stimulate the housing market. Prevent it from sinking any further than we already find ourselves. The money supply none the less is still tight because the criteria for qualifying for a loan are quite stringent. For those with good credit this is an opportunity to buy. Prices are still relatively low or flat in most of the country. To get an idea of the trend of interest rates over the past years take a look at the following.
The graph shows interest from 1990 to 2011. Rates have continuously dropped from 10% to 4%. Low rates under normal conditions indicate a very robust economy with the US dollar being very healthy. Yet we know this is not quite the case.
For the savvy investor one should know things can not stay like this indefinitely. Sooner or later interest rates are going to start creeping up.
The question you may ask what does this have to do with Purchasing Power. Strategically it has every thing to do with it. Note the next image.
Thanks to Pacific Access Mortgage for this graph.
The graph shows the effect raising interest rates by half points. At the low end P&I payments of $4500 per month, interest rate 3.875% a qualified buyer’s purchasing power would be $956,950. On the other hand at the high end interest rate at 6.00% the same monthly payment the buyer’s purchasing power would be reduced to $750,550.
It is not every day I can show a reader how to strategically make $200,000 in equity with the same monthly output. Hope you have the opportunity to use this information real soon, obviously it is time sensitive.