Should I purchase today or should I wait until prices fall even further. It’s a great question and every situation is unique, though an underlining key point is the amount you’ll pay to borrow money. No one knows positively what the market will do, have we hit bottom or will prices drop another 5 to 10%. if your intentions are to buy now and sell in one to three years, you should be extremely worried about timing but if your looking at holding on to your home for another seven to ten years, you’ll be in great shape.
Let us assume the worse and say you buy a home now at $400,000 and the market drops another 10% or $40,000 in value, that would be considered a paper loss, you haven’t actually loss that money until you sell. Interest rates are being artificially held down with the Government, Treasury or Federal Reserve buying 70% of all mortgages that are financed today. Will these entities continue buying mortgages at that 70% clip, probably not. Interest rates have no place to go but up. The 30 year fixed rate is now at 4%, an historical low, but what happens when those rates increase to 5% or even 6%. Dan Chen at Wells Fargo was kind enough to supply a cost analysis using the $400,000 purchase price.
Purchase price- $400,000 $400,000 $400,000
Down Payment- 20% 20% 20%
Loan Amount- $320,000 $320,000 $320,000
Interest Rate- 4% 5% 6%
Month/Payment- $1,527.23 $1,717.83 $1,918.56
The difference over the life of the loan from 4% to 5% would be $68,436
The difference over the life of the loan from 4% to 6% would be an astounding $140,700
Even if the housing prices drop by 10% or $40,000, it does not come close to the monetary increase in interest rates. This scenario is also assuming that we have not hit the bottom in home prices. Home prices in Davis have decreased by about 25% since the peak in 2005, but in the last three years values have slightly decreased, which suggest we might be closer to the bottom and could start seeing appreciation in the next couple of years. The one anomaly that will surely increase will be those historically low interest rates. Please visit my web site at www.JohnnyBrooksHomes.com for helpful tips on buying or selling a home and easy access to view all of the local area homes for sale.