The traditional 30-year fixed interest rate loan in Austin has dropped from near 4.0% to about 3.22% over the past year. The mortgage interest rate drops mean greater buyer purchasing power – much greater than a decrease in home prices. With the same monthly payment, buyers can borrow more money today than they could one year ago when mortgage interest rates are low. Thus, they can purchase a more expensive home. Austin home buyers are capitalizing on their resurgence in purchasing power as the 17-month trend in increase home sales evidence.
Buyer’s Purchasing Power Determines Home Prices
Buyer purchasing power is the driving force behind residential real estate pricing. On one side of the scale sits the buyer with money; on the other is the seller with a property and in between both sits the all-powerful lender – the party with the money. Home buyers’ purchasing power effectively determines home prices.
Lender’s Determine Maximum Loan Amounts
The lender determines the buyer’s loan amount. Each buyer has a maximum price they can pay to purchase property. Lenders know buyers are less likely to default if they allocate no more than 31% of their monthly gross income to their monthly mortgage payment. Accordingly, mortgage lenders refuse to lend more money than the buyer can repay at that 31% gross income ratio, amortized over 30 years.
When Interest Rates Rise, Buyers Can Afford Less
As interest rates increase, buyer purchasing power will decrease. Together, increased income and rising interest rates will level out buyer purchasing power. A decline in the interest rate will allow the buyer to borrow more money and thus have the ability to pay more. The maximum amount mortgage lenders will lend a qualified – credit worthy – buyer depends on current mortgage rates. As mortgage rates rise, the maximum price a buyer can pay declines since the amount they are able to borrow declines.
Buyers Control the Seller’s Price
On the other hand, sellers seek the highest possible sales price they can get from a buyer. The sales price of all homes sold within each pricing tier cannot exceed the purchasing power of buyers shopping in that tier. If all sellers within a tier hold out for above-market prices, buyers for that tier of property will not be able to buy. Thus, buyers control the price sellers will receive based mostly on loan funds available at current interest rates.
Purchasing Power at a Peak of the Market
Home buyers’ purchasing power is now at its cyclical peak. Austin home buyers and investors sensing this golden window of opportunity are acting aggressively to acquire their piece of the market.
Looking to Buy in Austin While Interest Rates are Low?
Buying a home in Austin while interest rates are low means you can afford to buy more house for less monthly payment. If you think now might be the right time to buy a home in Austin, check out our Austin Home Buyer Representation Program to learn how we’re different from your average Austin Realtor. Then, call us at (512) 827-8323 or email us at info@AustinRealEstateHomesBlog.com to schedule a no obligation consultation.