Postponing a Home Purchase Waiting for Home Values to Decline Further May Price You Out of the Market
U.S. home prices have declined across the nation in the past year—albeit at varying levels. Latest national price declines (and again I invoke the TINSTAANREM Clause — There Is No Such Thing As A National Real Estate Market) range from as little as 4.5 percent (Dallas, Texas) on a year-over-year basis in February to as great as 35.2 percent (Phoenix, AZ) according to S&P’s Case-Shiller Home Price Indices.
It is the anticipation by many prospective buyers for further home price erosion that keeps them on the sidelines and from participating in homeownership despite the lowest interest rates since Freddie Mac commenced the statistical series in 1971.
While further price declines may be realized, I believe the likelihood of rising interest rates makes purchasing now a better option than waiting for further potential value declines. Simply stated, there is a greater possibility of interest rate increases than potential value declines. Even with the price decline, the interest rate increase may result in the buyer no longer being able to qualify for a loan on a home they wish to purchase for which they qualify today. Despite facing a potential in declining home values, now may be a better time to buy.
To make the comparison simple, let’s assume a loan amount today of $100,000 with a 30-year fixed-rate residential loan at 5 percent. Nationwide at the time of this writing, the average 30-year rate was 4.85 percent per Freddie Mac. Fannie Mae forecasts an average rate in all of 2009 of 5.13 percent. So the 5 percent is a reasonable assumption.
The following table shows the monthly payment for each loan amount and interest rate. A buyer today at 5 percent interest borrowing $100,000 has a monthly principle and interest payment of $536.82. If prices decline 5 percent (and the loan amount does also) and interest rates rise just ½ of 1 percent, then the monthly payment remains the same ($539.40).
So if rates go up just 1 percent to 6 percent per year, then prices must drop at least 10 percent for that same buyer to qualify for the same monthly payment. A 1.5 percent increase in rates to 6.5 percent requires a 15 percent price decline, and a 2 percent increase necessitates a 20 percent price decline to qualify. Note: This 1 percent interest rate change to a 10 percent price change is only true when interest rates are 5 percent as they are today.
Admittedly, at the same loan-to-value ratio, as prices decline so does the down payment. Since, however, many buyers select the price range of homes they consider buying based on their monthly payment potential, rising rates may force future buyers into less expensive homes and hence properties they find less desirable.
Why do I expect rates to increase in the future more than price declines? First examine the Case-Shiller Table above. Aggregate 20-city prices have already declined 29.1 percent since peaking in July 2006. I believe much of the price decline has already taken place. And why do I anticipate rate increases? There are several reasons. Interest rates are the lowest in recorded history. But perhaps most important is the record deficit spending by Congress and the Administration and the expectation for that to continue. Borrowing a couple of trillion dollars this year coupled with a now-projected decade of deficits of at least $1 trillion per year sets the stage for a weakened dollar and corresponding rising interest rates. In plain speak—the massive deficit spending has a high potential to drive up inflation and hence interest rates. A topic to be discussed in a future blog.
If you agree with me, quote me. “Postponing a home purchase waiting for home prices to decline further may price you out of the market.” Ted C. Jones, PhD, Senior Vice President—Chief Economist, Stewart Title Guaranty Company.
Agree or disagree, let’s have some comments.
Ted
April 5th, 2009 at 5:38 pm
More people need to see this information as you have broken it down. Why do these stories fail to hit the headlines? This is exactly what I’ve been telling our potenital home buyers.
April 7th, 2009 at 5:39 pm
I agree with Ryan. I am in new home sales and have posted this link on our website, twitter and facebook. Thanks for this great explanation for our potential home buyers.
April 8th, 2009 at 9:12 am
Dr.Jones
Excellent blog. With your permission, I will use some of the information at next weeks Greater McAllen BOR meeting.
Thanks y Buena suerte
Saludos
AAA
April 8th, 2009 at 1:10 pm
Very well said and one of the key points in helping buyers to understand that now is as good a time as any to pursue their purchase. Here on a small island we mostly deal with 2nd home buyers, and there is not as much urgency here as in a primary residence market. However, the financial principles are certainly applicable.
April 8th, 2009 at 4:35 pm
Yes, I agree with you , Ted. If the Buyers out there don’t wake up and smell the roses, they will miss the boat. Then 5 to 10 years down the road they are going to wish they would have taken advantage of these wonderful interest rates.
April 8th, 2009 at 4:37 pm
Yes, I agree with you , Ted. If the Buyers out there don’t wake up and smell the roses, they will miss the boat. Then 5 to 10 years down the road they are going to wish they would have taken advantage of these wounerful interest rates.
April 9th, 2009 at 9:01 am
By all means share this. Ted
April 9th, 2009 at 9:03 am
I think we all will look back in 2 to 3 years and realize given the combination of low interet rates and the best pricing in two decades we should have acted. Ted
April 14th, 2009 at 7:44 pm
I only wish I had enough money to buy several homes in today’s market. There’s a lot of profit potential sitting out there.
Any potential for short-term loss is offset by the potential for longer-term hikes in interest rates.
April 26th, 2009 at 5:31 pm
now in my rss reader)))
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April 27th, 2009 at 1:27 pm
Looking at the above charts, the date for the peak for Las Vegas and Phoenix must be wrong. Their peak was long before that, maybe it should be ‘05.
April 29th, 2009 at 1:17 pm
Thank you. We have made the corrections.
April 29th, 2009 at 6:07 pm
Мне кажется это не совсем точно. На эту тему имеется несколько мнений. И у каждого человека со своим мировоззрением свое мнение.
Translation: Russian » English
I think this is not quite accurate. On this subject there are several opinions. And every man with his world view their opinions.
April 30th, 2009 at 10:22 am
Maybe the unemployment rate being almost double the current interest rate has something to do with it?
April 30th, 2009 at 1:28 pm
As usual, you are right on the money. I’ll share the blog with my network. We really should be getting the word out. It is a part of our job.
May 6th, 2009 at 1:13 pm
Hi, good post. I have been wondering about this topic,so thanks for writing. I’ll certainly be coming back to your posts. Keep up the good posts
May 16th, 2009 at 9:43 am
Very usefull, Thanks
May 17th, 2009 at 7:18 pm
Полезная информация
Translation: Russian » English
Useful information
May 24th, 2009 at 9:25 am
Очень познавательно. Спасибо.
Translation: Russian » English
Very informative. Thank you.
May 28th, 2009 at 2:30 pm
When rates go up prices will come down even further. We are in this situation because incomes are stagnant while expenses continue to rise. In fact if you include things like the dissolution of the pension system in the private sector and increased contributions to health care premiums and higher co-pays it is argueable that real incomes have fallen. Meanwhile lenders have reduced their max debt ratios, higher real estate taxes continue to take a bigger chunk of that ratio and minimum credit card payment increases as well. If you look at this from a practical perspective it appears that home prices have nowhere to go but down if the sellers truly want to sell in the short term.
May 29th, 2009 at 8:06 pm
Thanks very much for taking your time to create this very useful infos .
June 1st, 2009 at 8:27 pm
спасибо за статью… добавил в ридер
Translation: Russian » English
thanks for the article … Add to Reader
June 11th, 2009 at 11:06 am
Thanks for the useful info. It’s so interesting
August 25th, 2009 at 1:47 pm
[...] next recession. Don’t get burned. Thanks to Ted Jones for letting us reprint part of his blog which can be found here. Share and [...]
December 3rd, 2009 at 11:21 am
Ive been researching this and I’ll have to agree