Bubble Boy, Home Buyer in Norfolk, VA

Why do Realtors(tm) say it's a good time to buy because interest rates are low?

Asked by Bubble Boy, Norfolk, VA Mon Dec 17, 2007

I always see this among the other generic lines from Realtors(tm). That it is a good time to buy because interest rates are low. This seems very illogical. A higher interest rate would mean a lower price. This means one could pay off the property sooner. Higher interest rates means more interest earned on savings, not that many buyers have such a thing. Higher interest rates mean potential to refinance in the future when rates drop. Higher interest rates and lower prices mean more write offs for tax purposes. As a would-be first time buyer, I think I opt for higher interest rates and lower prices.

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Don Tepper, Agent, Burke, VA
Mon Dec 17, 2007
Bubble: There is some effect such as you describe, but it's not nearly as direct as, say, the bond market. Whole lot of reasons for that, including the fact that the bond market is emotionless, all facts and figures, while home sales incorporate a large dose of emotion.

But beyond that, it's true that in the bond market, as interest rates rise, the value of bonds falls. But the analogy doesn't work for housing. First, a bond's yield is directly tied to the interest rate because it's really part of the bond. A $1,000 bond at 8%, for instance. If I hold onto the bond until maturity, I know I'll receive the $1,000 back plus 8% interest. But with a house, its value and its mortgage are separable--it can be refinanced for instance--and the ultimate value of the property (say in 10 years, or 30 years) has virtually nothing to do with the interest rate of the initial mortgage--it has to do with market trends, construction, functional obsolescence, changing demographics, and on and on. Your scenario would work only if the original mortgage were inextricably linked to the property, regardless of who might buy or sell it during the intervening decades. If I bought a house back in 1978 with an 8% mortgage, and today I was required to sell it along with the 8% mortgage, when mortgages are under 6%, then the house would be less valuable than one at a lower interest rate. But I don't have to. I sell the house, and the new owner can pay cash...can finance part of it...can finance all of it...and the rate depends on multiple factors.

Plus, there are other restraints and constraints on housing prices, regardless of interest rates. For example, if interest rates doubled to, say, 11%, you might suggest that housing prices should drop by half. A $100,000 house will then be worth $50,000. Other than past historical patterns, indicating this doesn't happen, we have to recognize that many of the owners of $100,000 houses bought those houses for more than $50,000. Most, practically, would be unable to lower their sales price to $50,000...even if they wanted to. And so they don't. And on the other side, if interest rates were to drop to 2%, would that $100,000 house be worth $300,000? No. There's a limit on what people can afford. A 66% drop in interest rates would not increase earning power by a factor of 3. What that drop would do is make that $100,000 house more affordable to more people.
1 vote
Durenda Fach…, , Coastal Tampa Bay area. Pinellas and Pasco Counties.
Mon Dec 17, 2007

Buyer A borrows $100,000 @ 14% interest amortized over 30 years, and pays $1184.87/ month (payoff in 30 years

Buyer B borrows $100,000 @ 6% interest making $1184.87/mo, pays off the same loan in about 9.2 years.

If buyer B continues to pay himself the $1184.87 for the balance of the 30 years (while buyer A is still working to pay off his loan) , he has banked nearly $300,000 before calculating any interest earned.

Best of luck
1 vote
Deborah Madey, Agent, Brick, NJ
Sun Jan 20, 2008
There is a train of thought that believes raising the interest rates now would help real estate. Along that thought was not a lowering of the prices of the properties, as the forces of supply and demand do that. Actually, with this thought of raising interest rates, is also a belief that housing prices would stabilize or increase ever so slightly.

Many buyers are sitting on the sidelines tyring to time the market. If prices were to start rising, more buyers may step in and take action. That's probably not going to happen because we have too much inventory. If interest rates were to rise, and there was indication of yet more interest increases to come, the fence sitters would take action, so they would not have to pay more in the future. Buyers are sitting on the sidelines would take action, and the inventory would decrease, holding the market values stable.

While very high interest rates will negatively impact the market making it unaffordable, a slight increase in the current rates would keep the affordability in check and increase the buyer pool. Fear of loss (of the better deal) is a strong motivator.
0 votes
J R, , New York, NY
Sun Jan 20, 2008
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Obviously wasn't buying houses when interest rates were 16%. You know, previous to that big run up in interest rates, rates were very low and prices were low. Not saying there was no correlation between UNQUALIFIED people being granted mortgages on expensive houses they couldn't afford, and I do believe if rates go up prices will come down, but I also believe prices would have gone up considerably with or without low rates. People where I am are buying houses almost $1M for ALL CASH.
0 votes
Bubble Boy, Home Buyer, Norfolk, VA
Mon Dec 17, 2007
Durenda - the house prices will adjust to compensate for the interest rate change, so using the same house price is both situations isn't valid. I mean, we know now that they are going to continue to ruin the value of the US Dollar by lowering interest rates and houses still aren't going to sell. But that is for another topic.
0 votes
Kent Palmer, , Denver, CO
Mon Dec 17, 2007
Because this is the same kind of real estate market conditions that preceded the last real estate boom, but the interest rates are better. The people who made the most money in the last boom were the individuals that bought when everyone else was selling, 10-15 years back. Like any other market, the laws of supply and demand rule in real estate. Buy when everyone else is selling and sell when everyone else is buying. When there is too much it is undervalued, when there is not enough it is overvalued? Buy now so that you can sell later.
0 votes
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