As everyone knows, condo prices in Boston and across the country have been increasing pretty much every month, over the past four years (and beyond).

However, last month, for the first time in recent memory, the median sales price of condos in Boston actually dropped.

Unfortunately (if you’re a buyer, that is), while prices look as if they’ll be falling over the coming months, mortgage loan interest rates are on the increase.

This means, if you are planning on buying sometime over the next several months, your monthly mortgage loan payment will be going up, too.

Most people buy a home not based on the purchase price, but on how much their mortgage payment will be, every month.

Which made me wonder.

Can we figure out what the optimum price is, for condos? That is, the price at which people will decide to buy, instead of rent, and the price at which an owner can be confident of a sale?

Probably not.

That didn’t stop me from trying, though.

So, I picked a neighborhood at random, the South End. But I decided that I needed to narrow the data even more - to simply look at the median and average sales prices for all properties sold wasn’t going to be helpful, because there was such a wide range of sales, in size, location, and price.

So, I chose to look only at two-bedroom condos, in the 700-1100 square foot range. I pulled sales and per-square-foot data from the past four years, (information available on the Boston Realty Web site) in order to compare median and average sales prices. Then, I pulled interest rate data from the past four years, (from the HSH Financial Publishers site) in order to compare fixed and adjustable mortgage loan rates.

First question is, when were things good?

Well, again, it depends on your perspective.

Sales prices in the South End probably seemed high to just about everyone, over the past four years.

In reality, however, because of lower interest rates, monthly payments have stayed relatively constant, over much of that time.

Sales volume has remained steady, every quarter, all the way up until last fall, at least here in the city of Boston (the suburban market slowed, before this).

Last June, for example, it seemed as though no one had a problem spending $526,000 (median sales price) to $529,000 (average sales price) for a two-bedroom, 700-1100 square foot condo in the South End.

But, interest rates were lower, then.

The question is, if interest rates continue to go up, by how much will list prices need to drop in order for buyers to end up with the same monthly payments?

Here’s some historical data:

In June, 2005, it would have cost you around $3,000 per month to buy a $526,000 condo, based on the average fixed-rate mortgage loan rate of 5.57%.

In June, 2005, it would have cost you around $2,690 per month to buy a $526,000 condo, based on the average 1-year adjustable-rate mortgage loan rate of 4.57%.

In June, 2005, it would have cost you around $2,847 per month to buy a $526,000 condo, based on the average 5-year adjustable-rate mortgage loan rate of 5.06%.

(These examples assume 0% down.)

The average “family” income in the South End (ZIP code 02116) was $99,853, in 1999, according to the US Census Bureau. Assuming a three percent increase in income per year, since then, the average “family” income in the South End is probably at least $110,000, in 2006.

Mortgage companies try to keep a borrower’s housing-expense-to-income ratio at 28% (and total debt-to-income ratio at 36%), so the $2,600-$3,000 per month payment toward a mortgage loan estimated above was probably not too much of a hardship for the average (wealthy) South End couple.

What ended up happening last summer, however, is the typical buyer’s monthly mortgage loan payment went over $2,800, due to rising interest rates, and, as a result, the sales market cooled (I’m assuming a cause and effect, here).

Today, nine months’ later, your monthly loan payments on that $526,000 mortgage loan would be either $3,400, $3,140, or $3,253, depending on which type of loan you chose, due to higher interest rates.

So, in order for your monthly loan payment to stay around $2,800, the price you’d be willing to pay has got to come down.

The following chart shows by how much:

30-year fixed 1-year adjustable 5-year adjustable revised sales price

6.630% 5.82% 6.250% $455,000 (these are the average interest rates, today)
6.750% 5.95% 6.375% $449,000
6.875% 6.10% 6.500% $442,000
7.000% 6.25% 6.625% $435,000
7.125% 6.40% 6.750% $430,000
7.250% 6.50% 6.875% $425,000

Put a different way, the typical buyer will wait until a $534,000, two-bedroom, 700-1100 square foot condo in the South End drops in price by $79,000, to $455,000, before he or she will be willing to make an offer, based on today’s interest rates.

And, prices will need to come down, even more, if interest rates continue to climb.

Of course, all buyers hope that the median list price goes LOWER than that, right?

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