Yes as a buyer you do want prices to go down further so you can buy cheaper. Also don't fall for the rates are going to rise BS. Rates mean nothing if prices are still too high. Always better to wait for prices to drop further and if rates go up a bit so what. You can always refinance but you overpaying for a home is permanent. Just keep in mind all statistics show the IE will continue to get impacted hard by this RE crash. Good luck
As time goes on, the prices will slowly level out and then basically be stagnant. If you are purchasing a home to live in, then the real s not what is the price, but can you afford it. Certainly you want the best deal possible, but affordability is what decides if you can purchase at all.
The cheapest homes now and in the future will be the REO properties. These are properties that the bank now owns. However, they come at a price. Because the supply of area homes is rising the REO properties are taking longer to sell. Banks higher local Real Estate agents to list, manage, and sell the home. The bank requires the local agent to pay for utilities, lawn service, and other items while they list the property. However, many agents do not maintain the property. As a consequence the homes are showing their condition.
Keep this in mind when looking for "cheap" properties. What may not be reflected in the prices is the need to do repairs. The bank will not pay for any repairs and they are exempt from many disclosures that would normally be required when purchasing from a homeowner.
Price is not always the best indicator of a deal.
As to further price declines, it will vary by individual neighborhoods, not entire cities. Rancho seems to be stagnant on inventory between $600,000 and $900,000. I suspect this is due to the Wall Street loan mess. Prices may stabilize once we know where the loans will come from on a consistant basis. I'm writing a lot of short sale and REO offers this year. In Dec-Feb there was not much competion for these homes. Last week I had several sets of buyers looking in Chino Hills. Out of 9 properties we viewed, all had at least 6 offers in on them. One had 14. Of these, about half the offers were over the list price. As of this morning 1 of the prioperties showed a $25,000 price increase and a second listing agent called to inform me the bank will not accept any offers under $550,000. (The property is listed at $527,000)
Banks are beginning to see enough multiple offers they are deciding to hold off on accepting short sales in favor of doing the foreclosure and selling down the line.
As for the loan re-sets, the next wave begins in May. Personally, I'm not seeing the banks doing much to rewrite the loans. I think at least in California the federal programs are window dressing. For me the bigger scarey picture lies with inflation (read higher interest rates), energy prices and likely employment downturns. How long do you plan on owning the home? If your time frame is under 5 years, perhaps the risk is too high. If you buy now with an interest rate of 5.75% will you be better or worse off than if you save 5-7% on the price next year but pay an interest rate of 6.5-8%. I'd run some hypothetical numbers and be your own judge as to what is best for you.
Best of luck.
Tarbell, Realtors-Chino Office
1. If you check the bankrate.com mortgage history chart, you would see that in the recent 5 year history the 30yr fixed has been limited to the following range: 4.9% - 6.4% (actually, the range is tighter than that). Also, if you exclude the outliers on both end, and thereby exclude about 5% of the observatings, that range is further reduced to 5.20% to 6.20%.
(obviously, that chart has assumptions -> excellent FICO, 20% down, under 417K, so that the loan terms are best possible).
Based on the trailing 5-year history, a rate increase of 2% while not impossible, is outright unlikely.
You can go to mortgage-x and do analysis of longer history, but you would be crossing decades and periods of economic expansion / recession, as well as ultra-high inflation.
2. Even if rates increased, that is simply going to make a down-ward pressure on the prices. Why? For the exact same reasons you provide in your analysis: affordability in the form of monthly payment. Buyers can afford house price X based on what they can pay per month, Y. Assuming Y does not change, If mortgage rate goes up, buyer can afford house price smaller than X. There goes the pressure down on the prices,
3. Your analysis is based on holding the house and the mortgage 30 years. Try to choose a more reasonable holding period, that is inline with averages actually observed.
4. Let's consider two buyers. Buyer A bought high, with low mortgage rate. Buyer B waited, and bought lower with high mortgage rate.
A, paid $400K, mortgage 5%, in 2008, payment $2147 / mo.
B, paid $320K, mortgage 6%, in 2009 (price drop 20%, rate increase 20%), $2398.
(see, I have even chosen the example to be consistent with what you wrote in your article, i.e. buyer B is paying MORE per month).
Assume prices do not further decrease after 2009, increasing very slowly for a while (optimistic, I know :)) ).
- (i) If A has to sell, A is screwed. If B has to sell, no problem - exactly the point made by "Realist In Tâ€¦ " below,
- (ii) If, for some reason, rates go down, say to 4.5% (unbelievable, I know), gues who can re-finance and who can NOT? Even though not wiped out, A's equity is so low, that in order to refinance, A might have to bring 20% to the table,
- (iii) If, rates don't change, or for some reason, go up again say, 7%, what is different between the two buyers? Well, A is sitting on a $80K loss. B is paying $251 per month more than A.
Would you rather be A or B?? My calculator says that it would take 318 months (that's 26 years, BTW) for the extra payments made by B equal the loss experienced by A.
I say, in all three situations, I'd rather be B.
Moral of the story:
Lower basis (purchase cost) of an asset trumps getting a lower rate.
End of story, right?
No. No story is complete without a good P.S.
P.S. Next time doing price / loan rate analysis, please be informed that a loan at $450K is a JUMBO loan and "enjoys" an extra markup. In other words, comparing loans at $450K and $400K is like comparing apples to, oh, maybe frogs. But hey, you picked the numbers, right? So the buyer taking a $450K loan has a handicap equal to the markup on the JUMBO loans over the conforming, under-$417K loans -- currently at a whopping 85 basis points.
Anyway, just wanted to mention this in case you wanted to edit your highly acclaimed blog to at least compare oranges to oranges.
I don't actually think that they will fall by another 40% and truthfully, you and I don't really want them to. I know it seems that if prices were cut by an additional 40% it would be downright easy to find a home to purchase that you could afford, but the truth is that the reduction in price could be offset by the increase in interest rates that is sure to come - things can't stay this low forever.
Check out my blog where I did the math and discovered (much to my surprise as well) that the higher the interest rate climbs the more you wind up paying for your home - even with a lower purchase price. Here is the article (incidentally, it was picked up by some of the leading Real Estate and Mortgage information sites on the Net.
If you are a qualified buyer with good credit, an acceptable debt ratio and money available for a down payment then now is a great time to buy a home. There are lots of homes available and since prices have indeed come down from the stratosphere where they have been sitting for the past few years, I would highly recommend talking with a good Realtor to see what you might be able to buy now.
Feel free to give me a call, I would love to sit down and discuss your options with you.
Take care and have a wonderful day!
Tisza Major-Posner, Realtor, Keller Williams (909) 837-8922