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One More Reason Given for Not Buying a Home

We have been addressing some of the more questionable reasons people give for not buying a house each Wednesday. Three weeks ago, we covered Dumb Reason #1: Real Estate is no longer a good investment. Two weeks ago, we covered Dumb Reason #2: Renters are happier than homeowners. Last week, we covered Dumb Reason #3: Limited mobility is harmful to the country.

We will cover the fourth reason today: Dumb Reason #4: Never buy a house while prices are falling.

Most people would agree that it makes no sense to purchase any item if you know that prices are falling. Housing would seem to fit into that overall rule. However, there are a couple of other considerations one should think about before deciding against purchasing a home in today’s market.

If you are a regular reader of this blog, you already know that I feel strongly that the value of a home is determined by much more than the financial aspects of homeownership. The added comfort, security and sense of community in owning a home should also be considered along with real estate’s role as an investment tool.

To answer the reason given today, I will only look at the home from a straight financial angle however. How can I defend the purchase of an item that will continue to lessen in price?

COST vs. PRICE

When we purchase any big-ticket item, we should always look at cost not just price. Unless you will be buying all cash, you must take into consideration the expense of financing your purchase. It is that expense combined with the price that will determine the cost of the item. Obviously, when talking about a real estate purchase, the expense of financing is the mortgage interest rate.

Let’s take a look at how interest rates impact the monthly cost of a home.If prices go down but interest rates rise, it could mean an actual increase in monthly cost. Look at the chart. Prices would need to come down 10% to make up for a one percent increase in mortgage rates. You could decide to wait on your purchase based solely on price. However, if you think that interest rates could increase in the near future, it probably makes more sense to purchase now.

THE FUTURE OF INTEREST RATES

Interest rates are currently at historic lows. If we look at interest rates since 2000, we find that the average monthly rate was 6.29%. That is more than one and one-half percentage points higher than where they stand today. Though experts are pulling back on their original predictions of 6% rates by the end of the year, there is growing concern that rates will start to rise. Bankrate.com does a weekly survey of analysts to determine how many think rates will increase in upcoming months. The graph below shows that the number expecting rates to rise has been trending upward over the last two months:

When considering whether it makes financial sense to purchase a home right now, make sure you are considering the cost not just the price.


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1 reply
  1. SpecKK
    SpecKK says:

    Low interest rates raise home prices. The government has taken over the secondary market for mortgage bonds to increase demand and prop up home prices.

    If you are buying a home with cash, or even a significant down payment and a shorter term loan, lower rates increase your costs. Waiting for slightly higher rates and buying in the fall after the summer season can decrease over all cost.

    My current renting arrangement is very inexpensive (<$6000 annually). It costs me very little to delay home purchase and have even more cash to decrease my overall home cost.

    Reply

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