Mortgage Rates are Great but Should We Wait For Home Prices to Drop Further?

Posted by: Wayne Long on August 10th, 2010

Freddie Mac says that we have the lowest mortgage rates EVER!!  Well maybe not ever but since they started tracking the rates.   So maybe in the last 50 years or so…..

Additionally, home prices have dropped to some of the best prices in a long, long time.   So now the question is:  Do we wait to see how low home prices may go before we buy?

Here is some food for thought……

  1. Many people believe that home prices have found the bottom and are making a turn upward.
  2. Mortgage rates are at the lowest rate in 40 or 50 years.  It is hard to believe they will drop any further and are more likely to move upward.
  3. We should look at the math.

What if………

What if home prices did drop another 10%?  It’s very unlikely, but what if they did?   Well, if mortgage rates stayed the same, that would be great!  But, what if mortgage rates moved back up to a more normal 6.5% during the same time that the prices are dropping?

$200,000 X 4.5% = $1013/month

$180,000 X 6.5% = $1137/month

Whoa!  You mean the price of a home could go down 10% on a $200,000 home but my payment could go up more than 10%.   That can’t be right … can it?

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Comments

17 Comments on “Mortgage Rates are Great but Should We Wait For Home Prices to Drop Further?”

Brian Kinkade

Great point Wayne! And, just wait until both housing prices and interest rates go up! Then folks will look back, tell stories and long for these good ol’ days when they shoulda, coulda, woulda…

Christopher Jennings

So make a deal already. Its more safer now than seeing it go more higher. if it really goes down, then it may happen only one time. It will move up eventually.

Kevin OBrien

That is a great point. It is amazing, what a difference interest rates make. If rates rise people are going to have missed a great opportunity.

Yvonne

Congress has just given homebuyers more of a reason to buy now. In an effort to stabilize FHA, Congress has passed HR 5981 which Obama is expected to sign. This bill, “General and Special Risk Insurance Funds Availability Act”, is intended to allow FHA to increase its annual premiums for single family homes. What does this mean for home buyers today? It means it will cost you significantly more to finance your home if you get an FHA loan after 9/7/10. In previous posts I warned that FHA was going to make serious changes to its programs to remain solvent. I actually expected these changes in the first quarter of the year but they waited until the 3rd. This will permit FHA to increase its annual premiums from .55 percent to 1.55%. The rub is that the bill purports to save you money up front but boy do you get hit in the annual premium.

Josh

What a great time to buy. Potential home owners should take advantage now. Like you said, it isn’t likely they drop any further so this could be a great opportunity. However, who would have thought they would drop this low. Cheers!

Wayne Long

Brian you are exactly on target!!

John Dolan

If you’re worried about home prices going up (or down) you can lock in that view with the CME Home Price futures contracts. Today several of the 10 regional contracts for Nov. 2011 are quoted within a few percentage points of Dec. 2009 price levels. Why take the risk of not hedging against uncertainty?

Louis Cammarosano

Another point – If home prices in your area are at the right price i.e you can rent it out at market rates and meet or exceed your mortgage payments, then taking advantage of a 15 (under 4%) or 30 year mortgage under 4.5% would be a great deal.

While inflation may be quiet now, its a good bet that inflation will increase at some point during your 15 or 30 year mortgage.
When annual inflation exceeds your mortgage rate you are in a great position as you are paying back a low interest loan in a high interest environment, presumably when your salary has also increased to keep in line with inflation

Louis Cammarosano

But keep in mind if you buy a house now that is overpriced, low interest rates may not make up for overpaying, as the home value may decline and the decline may be accelerated when interest rate rise again

Carmen Brodeur

People who sit on the sidelines will ultimately be disappointed. This is the opportunity of our generation. Have you seen interest rates? They are practically giving away money.

Wayne Long

@Louis… good points! It is certainly not a sure thing that home prices are bottomed out as the economy is still very sluggish.

What is sure is that home prices are at historically good prices and mortgage are AWESOME!!

Alex Cortez

Great point, Wayne. The real estate industry as a whole needs to educate potential buyers that waiting for prices to drop the last 5 dollars can cost them thousands in financing via higher interest rates.

Daniel Statlander

We are seeing increase sales volume in South Florida for certain. Locale Bankers are telling me that mortgage applications are higher than they have been in years. FHA lenders are getting backed up due to the high volume of applications. All markets are a cycle and timing also playes a large part in the Real Estate market. Today the timing is such that it is a great time to buy. Home ownership is extremely affordable. you can live in a $200,000 for less than you can rent a 2 bed house. If you are looking for a property in South Florida now is the time to buy before you wind up kicking yourself.
Dan Statlander

Mitch Ribak

Great post Wayne and something I have been working hard trying to get our database of buyers to understand. Of course most of the time they are thinking that we are struggling Realtors who will say anything for a sale! The reality is, there will be thousands of investors and consumers who are going to wish they had bought when the prices and interest rates were so low!

jimwillson

Let’s just say the OC Register’s attempts to make it sound like bidding wars are the norm amuse me; the best strategy for a home seller is to price below market and let the market work Yawn. I’ve been suggesting that strategy to sellers for two years. Now let them mention how many chase the market down…

jimwillson
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Mortgages

Nathan Indianapolis

Hello, I have browsed most of your posts. This post is probably where I got the most useful information for my research. Thanks for posting, maybe we can see more on this. Are you aware of any other websites on this subject… Regards..

Belinidwina

You certainly deserve a round of applause for your post and more specifically, your blog in general. Very high quality material

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