The Cost of Waiting For Home Prices to Fall

The Cost of Waiting

For Home Prices to Fall

 The are numerous people out there who want to buy a home, but are waiting for home prices to hit bottom. They want a guarantee that they are purchasing at the best possible price. In some markets, you may see a little more dropping of prices, especially in areas really hit by the foreclosure market (of which Massachusetts has one of the lower rates). But waiting may not be in your best financial interest. You should be concerned with the cost of buying a house, which is quite different from the price of a house.

The real cost of a house is made up of the price and the interest rate you will be paying.

The National Association of Realtors just reported that the average home price in the 4th quarter of 2010 rose .2%. In other words, price remained steady. A buyer who delayed a purchase might find solace in the fact that prices have not increased. However, the other news released the other day paints a different picture. Mortgage interest rates now average 5.05%, up from 4.17% from the middle of the last quarter.

By sitting on the sidelines for the last 90 days a purchaser lost:

    - $89.44 a month

    - $1,073.28 a year

    - $32,198.40 over the thirty year life of the mortgage

If you buy a $340,000 home, double all these numbers.

It also means that if you qualified for a $300,000 mortgage three months ago, today you would only qualify for a $272,000 mortgage.  The longer you wait, the less you will be able to afford if the interest rates keep rising. That means you either have to buy a home with less of the amenities you want or maybe located in a less desirable neighborhood, or you have to come up with a larger down payment.

Bottom Line

Even if prices fall another 10% this year, the cost of a home will increase if interest rates go up more than 1%. If you are in the market for a home, you should not worry about where prices are going. You should be more concerned about where the interest rates are going, and what the cost of buying a home will be later this year or in 2012.

Jim Armstrong

The chart and some of the details are from kmcblog.com. For more details, please go to:

http://kcmblog.com/2011/02/11/the-cost-of-waiting-for-prices-to-fall/

Still Waiting to Buy a Home?

6 Reasons Why Now is the Ideal Time to Jump!

1. The number of homes available on the market is dropping significantly.


2. Home prices are lower than they have been in the last 3 years, but seem to be bottoming out.


3. Interest Rates are still historically at their lowest.


4. The Home Sellers are very motivated.


5. You can deduct your mortgage interest (plus other costs) on your tax return, something you can't do with rent.


6. There is a limited time $7500 tax credit for first-time homebuyers.

Many potential homebuyers have been sitting on the sidelines waiting for the real estate market to bottom out. It's not a bad plan, as long as you have perfect timing. The experts can't even agree among themselves as to whether prices have reached the floor, so trying to time the market can be tricky. Though there are plenty of people who are buying properties right now, it will be nothing like it the rush there will be once prices start to rise again and everyone decides to jump into the mosh pit of buyers making offers!

OK, so there will be more competition in the next 6 to 12 months, but you want to make sure that you don't overpay for a home that you may be able to get for less in 6 months. So if you wait, you will get a better deal, right?

Not necessarily. First of all the inventory (number of properties on the market) has gone down considerably in the last few months, giving you less choices. When supply goes down, demand goes up. When demand goes up, prices tend to rise. It's a basic law of economics. Compared to last year, there are 23% fewer property on the market today, and the number of sold listings are up. The good news for you is that the median on-market home price is down 5.8% compared to October 2007 (for Essex County). But with selection dropping, can it be long before the market turns around?
Mortgage rates are still historically low (take it from someone who paid 14% in the early 90's), with rates hovering around the 6% mark. But rates are extremely volatile, especially with the shape of the financial market and everything that is happening with Wall Street lately. A couple of weeks ago the rates dipped into the 5%'s, but that only lasted a week before jumping up to 6.5% (they have settled a little since). It is likely that rates will trend up, according to most experts. With each jump in interest, you will be paying more in your monthly payment, which would negate any (potential) savings you would make by waiting to buy.

Another reason to buy now is that you are losing all your potential tax benefit of home ownership. You are able to deduct all of your mortgage interest, PMI & closing costs when you buy a home. This would result in a significant tax savings for you. On a $250,000 mortgage that could mean $4600 in tax savings, or about $380 per month over renting. Try out the Rent vs. Buy and Tax Savings calculators here.

One of the recent incentives initiated by the Feds is the First-Time Homebuyer Tax Credit. It gives a 1st time buyer up to a $7,500 credit on your taxes when you buy any home purchased between April 9, 2008 and July 1, 2009. This is not a deduction, this is an actual credit. So if you owed $6,000 in taxes next year, not only would you not have to pay them, the IRS would give you an additional $1,500 refund. If you don't owe any taxes and you are expecting a refund, then the $7,500 would be added to your refund. How cool is that? The caveat is that this is really a refundable credit, so it would be repaid, but only at the rate of around $500 per year starting in 2011. It is basically a no interest loan payable over 15 years. Everyone should take advantage of this credit! Go here for some FAQ on this credit.
One thing I want to point out about what you hear in the media. All real estate conditions are local. What is happening in another part of the country has no bearing on what's the market is like here in Massachusetts, and especially the North Shore.

*All mortgage calculations and tax savings are estimates and are examples for informational purposes only. Please contact your financial, tax or mortgage advisor for more information.