Lately, I’ve had more clients ask me recently about my opinion as to when the best time to buy is.
I try to prep them that I’m about to give the standard “Now” answer, but for good reason. There are too many factors working against them if they wait.
There are many factors that one could decide as the “best” time. Price, rates, ability to qualify for a loan and other incentives should all be accounted for.
I personally feel that values may not be done going down and that a better price can be had next year or even the year after that. However, at what cost? We’ve seen in the past that low interest rates does not equal bad economy. In 1981, the US was deep in another recession and mortgage rates were over 15% all year except January (14.9%)! Here’s a link to past rates on Freddie Mac’s website:
In a previous blog, I spoke of Warren Buffet’s view of the economy. He felt inflation could get as bad as it did back in 1981. Scary thought.
Another big factor to take in hand is the $8,000 tax credit. I know most of us are hoping they will extend it, but the Fed has to put a cap on spending money eventually, since it is the driving force of investors fear of inflation. So hoping for an extension is reasonable, but expecting it is another story.
Now, let’s bring it all together. If values were to drop another 10% next year and that is the “Floor”, was it worth it to wait?
For the sake of argument, let’s assume most first time home buyers are buying around $220k in Western Washington. This is approximately where most of my first time home buyers are looking. A 10% drop in value would mean you would save $22k if you wait one year. Let’s subtract the tax credit, assuming it no longer exists next year. Our savings are now down to $14k.
Next, let’s assume a modestly higher interest rate. We are currently at 5.25%. In the summer of 2008, rates were at 6.25% due to higher inflation, so I will also use that as an example.
If you bought now at $220,000 on a FHA 5.25% rate, you would pay $209,737.44 in interest over the life of the loan. If you bought next year at $198,000 on a FHA 6.25% loan, you would pay $232.452.82 in interest. That’s a difference of $22,715.38 in interest.
So while you may have saved $22,000 in your price, you paid $22,715.38 more in interest on your loan and also missed on the $8,000 tax credit.
Now, I’ll be the first to admit that there’s many unknown variables used here, but I would say that all of them are reasonable. More importantly, you have to ask whether it’s worth the risk. Time is ticking on the tax credit, as you must have bought BY December 1st to qualify.
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