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2010-09-10 09:59:54

Should I Buy Now or Wait to See if Home Prices Fall in the Next Year

I was thinking about a question I regularly hear from buyers nowadays who are trying to figure out whether they should buy now, or wait for some undetermined time in the future in case they can get a better deal. It’s a thought process that paralyzes many and true to nature what typically happens is nothing. I think of it as analysis paralysis = entropy. And in this case the body definitely remains at rest. 

I cannot speak with any authority about any particular real estate market other than the one I work in: Chapel Hill – Durham- Orange County and north Chatham County. In my area real estate for the most part has been flat for the past few years. Higher end homes {$500,000 and above in general and $700,000 and above inside the Chapel Hill school district} have seen some depreciation but for the most part it’s been fairly nominal. Homes bought in the summer of 2006 are selling for more or less than same price now. Some of the areas I serve have actually seen some nominal appreciation, but again overall property values haven’t changed dramatically and I have found no data to suggest that we’re likely to see any major changes in the next few years.

Having been around awhile and gone through numerous real estate cycles I began to think about how best to advise customers and clients I’m with who ask me the question, “Should I buy now or would I be better of waiting?” Below are my thoughts.

Between 1964 the average mortgage rate was 5.45% in 1977 the average rate was 8.96% during this time period the rates fluctuated up and down.

From 1978 through 1990 rates got as high as 18.45% and the average during this time period was just north of 10%

I am not a mathematician, nor am I an expert in lending practices; and no one knows for sure what is going to happen to the interest rates. But recent history suggests that the current fixed rates for a primary home of approximately 4.25% won’t last too long. Presently based on what I’m already experiencing in the mortgage market there seems to be reluctance on the part of Lenders to lend and I can’t help but think that in part it’s because the rates are as low as they are, and the banks feel they can get a higher rate of return elsewhere.

 Now let’s run some numbers:

The following chart shows the difference that you would be paying for the same home at different interest rates. This is for P&I only- It does not include Taxes, Insurance or PMI if required.  

HOME PRICE $200,000.00
DOWN PAYMENT $7,000 (3.5%) This is the minimum amount down required by FHA. If you can put more down than this you should consider doing this for a number of reasons that I’m not going to get into right now. 

30 YEAR FIXED RATE

INTEREST RATES:
4.5% = PAYMENT OF $977.90
5.5% = PAYMENT OF $1095.83
6.5% = PAYMENT OF $1219.89
7.0% = PAYMENT OF $1284.03
7.5% = PAYMENT OF $1349.48
8.5% = PAYMENT OF $1484.00
9.5% = PAYMENT OF $1622.85

The DIFFERENCE in your payment from lowest to highest would be $644.90 per month. Even if we consider 7% to be a more reasonable estimate of where mortgage rates are likely to be sometime in the next 18 months we see a difference in mortgage payments of $306.13.

Now even though real estate prices in my geographic area aren’t trending downward; let’s project a 15% drop in values over the same 18 month period. In other words the same house that is currently selling for $200,000 is now selling for $170,000. (I do not believe you will find anyone who projects this for our local market but it’s interesting to consider.) 

Now the numbers are as follows:

HOME PRICE $170,000.00
DOWN PAYMENT $5,950 (3.5%) The minimum amount down required by FHA

30 YEAR FIXED RATE

7.0% = PAYMENT OF $1091.43 -  Compared to today’s payment of $977.90

In fact property prices would need to drop by 25% so that our imaginary $200,000 house is now selling for $150,000 at which point the monthly payment at 7% would be $963.03 before a Buyer would actually realize any savings.  Now no one can predict the future, but a quick look back in the 10 year period between 2000 and 2009 shows that  the mean average rate for a 30 year fixed rate mortgage was 6.5% and during three of those 10 years; the rates were between 7.25%- 8.5%, certainly it doesn’t seem like much of a stretch to guess that we’re likely to see rates approaching 7% sometime in the next couple of years. Even if you douby interest rates will get to 7% (and history clearly indicates you shouldn’t) if interest rates climb back to 5.5% property values would need to drop by a little over 10% to compensate for this 1% rise in mortgage rates. For Buyers wondering whether to buy now or wait to see if prices fall the numbers seem to indicate that now is the time to buy.
 


Larry Tollen is a fulltime broker with 20 plus years of experience in all aspects of residential real estate, including buying, selling, property management, investing, development, building, new home sales. He is SFR certified.  He served as Broker in Charge of The Home Team's satellite office in N. Chatham at the request of the owners while this office was in existence. He was On-site Sales Manager Legend Oaks, Chapel Hill NC from 2008 to 2010 and served as VP - Southern Vermont Board of Realtors from 2001 to 2003.  More info is available on his websites: NCHomesbyLarryT.com, SellChapelHill.com, and BestDurhamProperties.com.

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