Buyer's to Lose Purchase Power When Interest Rates Rise

Interest rates are expect to rise in 2014.  The United States Federal Reserve Bank (U.S. FED) has been artificially stimulating the economy to lower long term interest rates.  As the U.S. FED begins to ‘taper’, or phasing out the stimulus program, interest rates will increase.  What’s truly remarkable, is the effect of increasing interest rates and the resulting decrease in buyer purchase power.  A 1.0% increase in interest rate will result in a 10% loss of purchase power.  As the chart below demonstrates,  if you could afford a $2,000 monthly mortgage payment (principal and interest only), you could afford a $400,000 mortgage.  If rates increase by 1 point to 5.5%, keeping the same $2,000/month payment, then the mortgage amount would drop to $360,000.  That’s a 10% loss in purchase power.  The question I would ask,  why would you wait to buy a home and lose 10% of your purchase power?

Buyer Purchase Power