How tiny mortgage rate moves can buy you a lot

Mortgages rate moves impact
Mortgage rate impact   

It may seem like mortgage rates have been vacillating in a tight range, brushing up against 4 percent on the 30-year fixed and then falling back. Rates, however, are still considerably lower than they were a year ago.

That translates into far more buying power for the average consumer, heading into the busiest housing season of the year. But how much more?

John Burns Real Estate Consulting looked at the typical American family, earning $60,000 a year. They can afford about $1,800 a month for the mortgage payment, given a normal amount of other debt. For a 30-year fixed-rate loan, back in 2000, when rates were 8 percent, that would have qualified them for a $245,000 loan. At 4 percent, which is where rates are headed today, they can qualify for a $377,000 loan.

"In other words, each 1 percent drop in interest rates in the last 15 years has allowed home sellers to raise price 12 percent," according to the firm.

Rates at this time last year were at about 4.5 percent, so that allows for 9 percent price appreciation on homes. That, however, is just on housing affordability. We've seen prices in some markets rise more dramatically due to short supply. In California, for example, prices shot up in 2013 and 2014. Weakened affordability hit sales hard in January, even as supply increased.

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"While the statewide unsold inventory index in January jumped to the highest level in nearly three years, the increase can be attributed in large part due to the drop in sales," said Leslie Appleton-Young, chief economist for the California Association of Realtors.

Mortgage applications Bank of America
Patrick T. Fallon | Bloomberg | Getty Images

Favorable interest rates are supporting buyer traffic, according to a February survey of real estate agents by Credit Suisse, but low supply is still a sticking point in most markets.

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"Comments on low inventories were more prominent, with agents largely seeing limited selection adversely impacting transactions but lifting prices as competition per quality listing intensifies. Additionally, comments on buyer resistance to rising home prices were more pronounced," according to the survey.

Weekly mortgage applications are set to be released Wednesday morning at 7 a.m. EDT.