Published: May 28, 2010 12:34 PM EDT
Updated: May 28, 2010 9:34 AM EDT

There have been a record number of home buyers taking advantage of bargain basement prices but there are still countless fence-sitters waiting for prices to fall even further.

These buyers may be surprised to learn that while they were waiting for prices to fall, interest rates were rising, thus making their purchase LESS affordable.

 WINK Real Estate contributor Denny Grimes says non-cash buyer's focus should not be on prices alone.  They need to consider what's called interest rate risk.  What good is the best deal in the world if you can't afford the monthly payments?

 Buyers should realize that as interest rates increase, their purchasing power decreases. 

For Example:  Assume a buyer is qualified for a monthly payment of $1,600. If the interest rate is 5% on a 30 year mortgage that would equate to a loan amount of $300,000

 Look what happens to their buying power as the interest rate increases.

 

    Interest Rate                                   Loan Amount

 

                   5%                                           $300,000

                   5.5%                                        $285,000

                   6%                                           $270,000

What this means is that if prices don’t fall and interests rates increase from 5 to 6%, which many feel is in our future, a buyer’s purchasing power is reduced by 10%.  Or, another way to state it, if interest rates increased from 5 to 6%, prices would have to fall 10% to keep the buyer’s purchasing power the same.

 Buyers have had a rare opportunity over the last several years because they have had BOTH falling prices and LOW interest rates.

 But for the buyers looking in the under $300,000 price range, there could be a 180 degree shift, which would mean rising prices and rising interest rates.  There isn’t a good reason for a buyer to be on the fence if they are in that price range.

Median Price up 25% from it’s low point

Median Price up 12% so far this year

 

If you are going to sit the fence, at least straddle it so you can watch prices AND interest rates.