Yesterday, we talked about real estate as an investment. At the conclusion of that post, we talked about the difference between the ‘cost’ of the home compared to the ‘price’ of the home.
We established that the cost of the home had two major components: the price and the expense of the financing. Unless you are paying cash for the house, the mortgage interest rate is a key determining factor in what the home will cost you over the term of the loan.
That is why, even though prices are still receding, a person should probably buy now instead of waiting and trying to time the bottom of the housing market.
The New York Times back in July said:
“If prices come down another 10% but interest rates increase by 1 percentage point, that would mean the same monthly payment today versus waiting.”
But, why am I suggesting that rates might rise? Let’s take a look. Here is a graph of rates over the last six months:
Looking at the graph, you might say there is no reason to believe that rates will reverse their current trend.
However, let’s look at rates over a six year period from January 2003 to December 2008. As we can see, interest rates fell below 5.75% four times during that interval. Each and every time they went up, they did so quickly and dramatically.
It is safe to assume, based on history, that when they reverse course this time it will be the same. They will rise quickly and dramatically.
When might this happen? The government, in an effort to stimulate the economy, has been artificially keeping rates low for the last year as evidenced by the following chart:
The administration has already announced that they can no longer afford to continue the practices that were responsible for holding down the interest rates and will end the program by March 30, 2010.
The result?
The New York Times again reported on this in October:
“As the Fed begins to wind down its purchases in the next few months, rates will become less enticing. Analysts expect them to rise to at least 6 percent from the current 5 percent.”
Buy before the rates rise. In the long run, you will probably save more money than if you wait for prices to stabilize.
You should also consider the benefits of the Home Buyer’s Tax Credit.
A special guest blogger, Dean Hartman, will cover other mortgage news and the Tax Credit tomorrow.
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