Playing the Waiting Game? Do the Math.

The financial pundits and real estate gurus are all claiming we need at least another 10% price decline in the housing market before we revert back to the 4% per year increase in the trend line.   As I read the financial news I think about inflation heating up faster than expected.   Eventually something will be done to keep it at bay.   This may actually bode poorly on the homebuyers looking to capitalize on a œgreat deal by waiting to bottom-pick the market.   (Professional traders have a difficult time bottom-picking markets.)     Almost all home buyers finance part of their transaction and are somewhat sensitive to interest rates.   Since rates are near historic lows, does it  make sense at this point to wait any longer?   No.  

The prediction that prices need to drop another 10% is based on  the nationwide historic growth of home prices at about 4% per year over the last two decades of the 20th Century.   After year 2001 we observed the trend grow steeper just as the entire lending business went wild with easier financing products turning almost anyone into a mortgage customer and home buyer.   Since late 2006 prices have been in steep decline as lending guidelines have tightened, restricting unqualified shoppers from competing in the housing market.   We are retreating back towards a natural trend line of modest growth and the expectation is for an additional 10% decline in home prices.  

Everyone is entitled to their opinion or prediction of the future.   Therefore, I will humbly make a conservative prediction as well.   Mortgage rates will be higher by at least 1% by the time home prices reach the trend line.   When the 2008 elections are over, expect the truth to unfold.   Inflation is hot and needs to be dealt with to prevent a new set of issues to heat up.   The Federal Reserve Bank cannot ignore that fact forever and the textbook response to combat inflation is by raising key lending rates accordingly.   Bank rates have been artificially cut to provide liquidity for an uncertain mortgage market.   The actual benefit of these rate cuts has been to increase the profit margins of investors while the consumer has seen only modestly lower rates.   Choose how you want it.   Enjoy the low rates now or take the low prices later.   Consider the following example:  

$400,000 purchase

20% down payment

$320,000 Loan amount

6% Interest 30 year fixed rate  

$1918.56 Full Monthly Payment  

$360,000 purchase (10% price decline)

20% down payment

$288,000 Loan amount

7% Interest 30 year fixed rate  

$1,916.07 Full Monthly Payment

$2.49 difference in savings

Assuming prices do decline another 10% from current levels and mortgage rates increase by 1%, a person buying a $400,000 home at 6% interest might find that same home for $320,000 at 7%.   Nobody has a crystal ball but there is reason to believe with inflationary pressures on the economy, the Federal Reserve Bank will eventually raise rates and the cost will be passed on to the consumer.   In this example, the net savings of waiting are only $2.49 per month which is cheaper than one additional cup at the coffeehouse per month.  

The home shopper currently renting a home is behooved to make a move out of their negative cash flow situation, which is what paying rent essentially is, and into the leverage and benefits of home ownership.   The current home owner needing a sale on their current home before purchasing another home would do equally well to swap now given the marketplace offers a œwash on home prices at any point in time.   If waiting to buy a home has been your strategy to pay a lower price, be ready to pay for it with cash.  

© 2008 Michael S. Amers

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