If you've been thinking about buying a house but are discouraged by rapidly inflating real-estate prices, then let me give you a reason to wait no more: Mortgage interest rates are still less than half the historical average.
Between 1971 and today, the average rate on a 30-year fixed-rate mortgage is 8.52%. Right now, according to Freddie Mac's primary mortgage market survey, it's at 4.14%.
Mortgage interest rates and home prices
I can't emphasize enough how significant this is. For instance, as I've discussed before, let's assume you purchase a $250,000 house with a 20% down payment and finance the rest with a 30-year fixed-rate mortgage.
At 4.15%, the total cost of the house (interest plus principal payments) is about $400,000. At 8.52%, by contrast, you'll end up paying a little more than $600,000.
My point is that mortgage interest rates matter as much as, if not more than, the actual cost of a house when all is said and done.
Mortgage interest rates and affordability
It's for this reason economists and housing-industry experts often refer to so-called "housing affordability," which factors in both interest rates and home prices to determine whether a typical American family can afford a median-priced home. And right now, at least from a historical standpoint, houses are still unusually affordable.
Since 1981, the National Association of Realtors' housing affordability index has averaged 124.8, meaning that a family with a median income has 24.8% more income than they need to afford a median-priced home. Today, the index is at 159.3!
Excepting the years immediately following the financial crisis, houses have never been as affordable as they are right now. And the reason is that mortgage interest rates are still ridiculously low.
Low mortgage interest rates won't last forever
This situation can't last, however. As you may recall, beginning last year, the Federal Reserve started to "taper" its monetary support for the economy.
What has happened since? Mortgage rates increased from 3.4% to 4.5% between the beginning and end of last year. And while they've since settled back down to the current 4.15%, they're ultimately bound to go higher.
Although it may not seem like it now, the economy will at some point improve in a substantive and sustainable way. And when it does, interest rates will respond in kind -- that is, they'll increase.
So, by lamenting the current trend in home prices, you may be missing the point that mortgage interest rates are the single most important variable when it comes to determining the total cost of homeownership.
