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The Price is Right

Although it’s impossible to predict the bottom of our real estate market with anything other than months of perfect hindsight after the fact, who can blame home buyers in this economy for at least attempting to time it to their advantage?  In the best of times, saving big on one of life’s biggest purchases is as American as apple pie.  In troubled times, it’s a daily crusade.

Yet, even if one could magically time bottoming home prices to the split second, you would still make a tactical mistake as a would-be borrower if you failed to notice a similar bottoming-out of mortgage interest rates.  Indeed, by allowing interest rates to climb while you wait for prices to fall, you can easily end up paying more for a property than if you actually bought it at today’s price while locked into today’s historically low interest rate.  That rate is presently hovering around 4.88%, give or take.

Meanwhile, there’s scarcely an expert on the market who doesn’t fully believe that mortgage rates have but one way to go—up.   Rates have essentially been held as low as they’re likely to go for quite some time now in order to stimulate sales.   However, March 31st is expected to mark the beginning of a trend toward fewer stimuli and more tough love for the housing market—mainly in the form of higher interest rates.

That day—the last of this year’s first fiscal quarter—is the deadline the Federal Reserve has given itself to begin scaling back on its widespread purchases of mortgage-backed securities.  Once this deadline has passed, most experts believe the Fed will begin in earnest to wean itself from propping-up a market that is already showing encouraging signs of sustaining itself through the lowest prices of a decade.

Some analysts, like HSH & Associates—whose entire business revolves around accurately forecasting trends in mortgage rates—believe they will nudge closer to six percent before the end of the year.  They are joined in this belief by Moody’s Economy.com and the Washington Post, both of whom likewise expect a 6 % interest rate by the end of 2010.  Other forecasters, such as Mortgage Market Guide’s Barry Habib—nicknamed the “guru” of interest rates—are predicting rates to go as high as 6.5 % by the end of the year.  Morgan Stanley predicts an even higher rate—of between 7.5 and 8 %.

Even if you possess the luxury of deferring your housing purchase until you are completely sure prices have stopped falling, waiting for them to decline is fast becoming less and less of a reliable money-saving strategy.  Should prices fall further still, waiting could easily produce a scenario in which you end up paying more money over the life of the loan than if you purchased the home right now at a higher price and lower interest rate.

Let’s say that the home you want is reduced 5% in price, then by another 5% over a six month period; but is accompanied by a corresponding rise in interest rates—first to 6.0 %, then to 6.5 % by mid to late 2010.   Here’s what would happen:

The lower-priced options appear very seductive at first, their reduced prices accompanied by smaller down payments and lesser loan amounts.  Yet by waiting for prices to drop another 5 to 10%—while factoring in both the low and average projected rate increases for 2010—the loan eats up as much, if not more, than you ultimately saved by waiting for price reductions on the property.  So why bother?

Inventories of existing homes across Sarasota, Manatee and Charlotte Counties—are in a steady rate of decline at long last.  In January alone, inventory fell by 20-25 %; while the strength of closed and pending sales suggests that our market is fast finding its legs again.  Moreover, as MLS statistics show, we have bottomed-out in the price ranges below $300,000 and are seeing multiple offers on some of the best buying opportunities that remain.

Buying now not only saves you money in the long run, but gives you more options to consider—and more room to negotiate—than you might otherwise enjoy six months from now when inventories are further depleted and sellers are more dug-in on their prices.  It also avoids the disappointing scenario of losing a much-desired property to another buyer who didn’t share your strategy of holding out for a lower price.  Far from sitting back to see if prices drop any further, the smart money is out buying wherever the property fits and the price is right.

  • User Gravatar Carol Krug
    February 22nd, 2010

    Great news!

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