What is More Important to the Homebuyer? Price or Interest Rate?

Let’s say you are looking to buy a new home this year. First, that makes you smart, since 2011 may have the best combination in the history of home-buying, for affordable home pricing, wide choice of available homes and historically low interest rates. But you’re not just smart, you’re really smart. You’ve done your homework, and you know that prices are really low, but you’re not sure they have reached the bottom yet. Is it worth waiting another 6-12 months to see if the home you want might come down a little bit more? Definitely not, and here is why.

Let’s say you want to buy a home currently reduced from $500,000 to $400,000, a 20% discount from peak pricing (not at all uncommon these days). You feel like you are getting a good deal, and a lot of home for the money. But you are concerned that it might be better to wait a little longer and see if prices drop another 5-10%. Most industry experts think prices are already at the bottom, or within 3-4% of it, but let’s be excessively conservative. Let’s use your “worst case” assumption that the home will be priced another 10% lower in a year, and you can get that home for $40,000 less, or $360,000.

But where will interest rates be in a year? Most experts agree rates will be higher in a year, but nobody is sure exactly how much higher, so let’s assume they go up just 1% from the current rates in the 4.25% range. In our example, your worst case home value of $360,000 in a year with a 5.25% mortgage rate will have a monthly payment of $1,889 (assuming 5% down). If you buy the house today for $400,000 with a 4.25% mortgage, then not only will your monthly payment be lower ($1,869 with the same 5% down), but you will have been living in your new home for the past year, and smiling at your personal financial wisdom, while interest rates increase from these historic lows and your friends who were sitting on the fence kick themselves for not buying sooner.

Footnote: If your friends who waited do not see any price declines, and buy a $400,000 home after interest rates go up 1%, they will be paying $2,098 per month for their mortgage, $229 more than you, and $82,440 more in mortgage payments over the life of the loan.

Now is the time to buy.

Submitted by: Barry Gittleman, Vice President of Land Acquisition & Strategy at John Wieland Homes and Neighborhoods