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The biggest risk for today’s home buyers is interest rates not price depreciation. Yes, home prices are under pressure and there is inventory in the market, but waiting to define a “bottom” in a real estate downturn that is 24 months old and where prices have already adjusted, is very difficult.
The bigger issue and real risk to buyers are interest rates. A sudden rise in interest rates can easily erase the benefit of finding a home at a “bargain”. Long term interest rates are directly impacted by the health of our economy and inflation. If the economy if struggling or if there are rising expectations of inflation, long term interest rates will rise. Both of these factors are at work in the market.
Why are rising interest rates so “bad” for me? Because most people finance the purchase of their home and any increase in interest rates will decrease what you can borrow. The impact is significant. Here’s an example:
During the past 45 days (May 1, 2008 to June 15, 2008) interest rates on 30 year fixed mortgages have increased up to 0.75%. Now, this doesn’t sound like a large increase until you examine the impact on a borrower. A 0.75% increase in interest rate for a borrower who qualifies for a $400,000 loan would reduce their qualification to $369,900. This is a decrease of -7.6%. Unless the home has depreciated 7.6%, or the seller cuts you a “deal”, you’ve lost by waiting. You’ll qualify for less or pay significantly more in interest over the term of your loan by waiting.
No one can accurately predict the future of real estate values, but historical trends tell us that over the long term, real estate is a great investment. In addition, prices have already adjusted in many markets. If you are considering buying a home, now is great time. Interest rates are still relatively low and the risk of rising interest rates is real.
