Sunday, April 25, 2010

Gawd, I heard it again

I stopped an an open house today, I couldn't help myself. I saw the sign and it pointed to an area I am interested in so I followed the signs to a house WAY larger than anything I would ever consider. But I stopped just for the hell of it. I was greeted by a typical realtor who proceeded to tell me about the house (which was fine). Then he asked if I had an agent, and on and on. Then he let fly with the "there's never been a better time to buy". Ok, fight's on. I ask "how so?". Well the interest rates are at historic lows making payments more affordable than ever. I wasn't feeling much like arguing so I said "thank, but it was too big for me and left".

How do you feel about these low rates. The low rates are making homes more affordable than they have been in a long time. However the low rates are also helping to prop up home prices. People buy homes based on monthly payment, not total price. Most buyers will figure out what monthly payment they can afford and the current interest rate will allow them to calculate how much they can spend. Rates are currently very low compared to long term average rates. So, what happens if rates go up? People can't afford as much house. This puts pressure on prices. In a normal market demand dictates prices. If people cannot afford the payments at a higher interest rate, demand drops and prices will follow.

Assuming the monthly payment is the same, what's better, a low price with a high interest rate or a high price with a low interest rate? It should seem obvious but a lower price with a high rate is better for several reasons.

1) If rates drop you can refi. With the rates as low as they are now you can forget about a future refi to take advantage of rate drop.
2) A lower purchase price means lower property taxes. And who doesn't like lower taxes.
3) If you do buy when rates are low you face the possibility of a drop in value if rates spike. You could easily find yourself underwater, trapped in the house.

There are some other advantages of a high interest rate. A lower purchase price and a high interest rate it makes paying off the home early much more attractive. If you can pay extra towards the principal you can really cut down on the total cost of the home and pay it off early. Because much more of the monthly payment is interest the mortgage write off might be higher.

Are interest rates going to shoot up. I'm sure they are..... eventually. Personally I don't think they are going anywhere for a few years. The government will need to keep the rates low in order to keep the economy from totally tanking. Also inflation is still relatively low so there isn't much pressure to raise the rates. But 5 years from now things could be very different. So if you buy, buy something you will want to stay in for a while.

12 comments:

Scott said...

I agree. I would rather buy in a low price/high rate environment than in a high price/low rate environment, especially if the rate is artificially lowered by the government. A low price/high rate could give you the opportunity to refinance in the future and it provides more protection if you have to sell in a high rate environment. Of course, this assumes your payments would be the same in both cases.

WillyWanker said...

You people are forgetting that if you have a low interest rate that you might be able to sell the house later on by carrying paper on it. 'Owner Will Carry' will be the next way for owners with wonderfully low interest rates to offer an incentive for buyers to opt for their house over another one. Furthermore, you are forgetting something that may already be happening~~~as interest rates begin to creep up and with home prices as low as they are AND with the added benefit (or perception, whichever doesn't matter as it IS happening whether one wants to believe it or not) that the economy is beginning to pull itself out of the 3 year recession, you will have more and more people getting into the real estate market. Fence sitters will not remain there for long in the Inland Empire. If you think prices have much further to drop, you are betting against all common sense.
Wait and see if prices come down at your own risk. The same way that 'bulls' were 'bullish' during the bubble and refused to see the end of the ride for property prices, 'bears' are behaving 'bear~ishly' and are, too, not opening their eyes to the shifting market forces.
No one is saying 'buy now, or be priced out FOREVER'. Many are beginning to say 'buy now or risk paying more later'.
Will the market return to the heated buying and selling of '06? Of course not. The lending criteria will never be the same again~~~at least not in our life times. But banks will, once again, begin to make jumbo loans to qualified buyers. They are beginning to do so, now. All~cash buyers are in the drivers seats in high end housing, now~~~where some of the best bargains appear to be found.

VectorzSigma said...

I think I might have to agree with the realtwhore for once. There probably hasn't been a better time to buy. Riverside prices are back to 2001 PLUS the low interest. What more could you ask for? There's still a great possibility the future might hold an even better time to buy as well but that is yet to be seen.

theyenguy said...

You relate: "The government will need to keep the rates low in order to keep the economy from totally tanking".

I believe that interest rates on the US Ten Year Note are going sky high as investors will come to see lendeing to the US Federal Government as highly risky: I see a liquidity evaporation leading to a stock and bond market collapse. In the future, I believe properties will be leased not bought.

I've been living in Bellingham, and Whatcom County Washington for ten years; I encourage that a family come and rent a home during June, July and August for the recreational adventures at the local water slide and at the farmer's market; and then make a decision as to relocate here as I believe it will be better here for people when the depression comes.

Perhaps you and others might enjoy my financial articles -- they are quite bearish.
http://my.opera.com/theyenguy/blog/index.dml/tag/Financial%20Reports

golfer_X said...

Victor, the realtor was not right. Anytime between 93 and 99 was a way better time. Prices were low and rates were higher. But rates came down so those folks can refi and get the best of both worlds. Prices today are good payment wise because of the low rates. However, there is definitely a much higher risk of rising rates trapping a lot of people in their homes. I keep saying the same thing. Buy, but only if you plan on staying in the house for at least 10 years.

VectorzSigma said...

You really think Riverside is going to go down more? I mean houses have already dropped 50-75% ... how much more could they go? I bought my house so low that the insurance won't even cover it for that low.. I had to buy insurance 1.5 x the amount I purchased at.

Tyrone said...

VectorzSigma,
You're reading Dr. Housing Bubble, right?

He provides a lot of good data. Using that, you can draw your own conclusions about future prices.

golfer_X said...

I doubt prices will drop much more in Hemet or the surrounding areas out there. I think the core areas can certainly drop further and the OC and LA can drop a lot further.

Newbie Blogger said...

I generally agree with you GolferX. But I don't see interest rates having that much of an effect on price right now.

Much of the competition for houses right now is from cash buyers. They are relatively immune from interest rates. If the interest rates go up, some buyers will get priced out of the market. But the cash buyers will still be there and since they are driving a lot of the sales right now, the effect will be minimal.

Right now I think that prices are going to be drive more by the rental market. If there rental market were to collapse, then investors would reduce what they are willing to pay.

golfer_X said...

Right now interest rates haven't moved enough to affect prices. They won't affect prices until they hit around 8% above that it will start to drag the prices down as less people will be able to qualify.

I'm not sure I totally agree about cash buyers keeping the prices up even if the rates climb. Cash buyers are around 30% of the sales right now. That's much higher than the average (around 15%) but its because there are so many investors at the low end. As you creep up the price ladder the cash buyers taper off dramatically. As long as people can make a buck flipping or renting homes there will be cash buyers. Right now the ratios are good. But rents are falling and the amount of rentals is skyrocketing putting even more pressure on rents. If this trend keeps up (and there's no reason to assume it won't) eventually the ratios will make investing in real estate less attractive and the cash buying will taper off.

VectorzSigma said...

GolferX, I agree with you on prices in LA and OC have a LONG LONG way to fall but I assumed we were talking about Riverside & SB County (which this blog is supposed to be about?)

doghouse said...

1st, were NOT in LA/OC,
2nd some of you will wait until prices increase and rates rise, then cry because you didn't get a deal.
3rd, were inland empire, we have hit bottom, and rates are rising,
the realtor WAS right!
seems like you just can't fix stupid! (if the shoe fits, wear it)
I constantly monitor home prices, they are NOT dropping,, in fact
1st quarter this yr,increase of .06% not much increase ,but not decrease either.
I guess what I mean is,there is not better time to buy than NOW!
don't be crying later to us, as you have had your chance.