One of the great things about this gig is all the really great emails I get from people. Recently I received an email from Ron, who used his own house financing history from the last few years to demonstrate the effect that interest rates had on house prices. It’s easy to see from Ron’s examples how interest rates fueled the boom, and how they are affecting the bust.
I thought Doomers would appreciate his "real world" examples. Thanks Ron for sharing!
Below I will attempt to show you how the fall in interest rates from 2000 to 2003 led to large increases in price, and how the current pullback/slowdown makes total sense when looking solely at interest rate changes in these time periods. In 2003 I observed a 2+% difference between a 30 year fixed rate and a 3/1 ARM,where today when I look I only see a .375% difference.
Disclaimer, these numbers are totally from my experience, I didn’t research all these numbers and dates, but I do have notes I have saved over the past 7 years from when I was buying the homes I have lived in. I will give you the rates I personally saw at the times Iwas buying. So take these numbers for what they are, I am sure different people surely may have seen different rates but these should be good guidelines/estimates for the time periods I mention.
In June of 2000 I bought my first home in Tempe, AZ for $130k. I acquired a 30 year fixed mortgage at 8.25%, and my monthly payment was ~$1135 amonth (I had to pay PMI as well). For simplicity I am going to give you examples using a $200k house in all of my charts. Below were the approximate rates I had available to me at the time. An interest only loan was not an option for me then, so I didn’t include those payment options. Also these payments only include P&I, not taxes and insurance.
|
Year |
LoanAmt |
30 yrrt |
30yrpmt |
5/1rt |
5/1pmt |
5/1 IOpmt |
3/1rt |
3/1pmt |
3/1 IOpmt |
|
2000 |
$200,000.00 |
8.25% |
($1,502.53) |
7.25% |
($1,364.35) |
|
6.75% |
($1,297.20) |
|
