Saturday, March 01, 2008

Ignore the Headlines

There was a very good article in Time Magazine last week entitled "Ignore the Headlines." So good, in fact, that it was emailed to me by about five people, including lender Dana, my wonderful manager Mike Napolitano, and the owner of Dilbeck, Mark Dilbeck. In it, famed money guy Stan Lynch is extensively quoted about timing regarding buying housing. Click to read it here. Among other things, it says:
"Consider a typical home that sells for $218,900. You put down 20% and get a 30-year fixed-rate mortgage at today's rate of 5.5%. Monthly principal and interest come to $994.31. Let's say that 12 months from now the same house goes for 10% less, or $197,010. But by then the recession is history and the Fed is jacking up rates to stem inflation. If mortgage costs rise a point, to 6.5%, your monthly payment would be $994.94 and you'd have saved nothing. Meanwhile, home prices might steady and sellers might become less willing to negotiate. And you have spent a year living someplace you'd rather not be."

In short, your monthly housing payment is going to be about the same, because the lower housing prices go, the higher interest rates will likely go.

4 comments:

  1. Anonymous3:26 PM

    There is no direct correlation between lower housing prices and higher interest rates. Interest rates might be higher after a prolonged housing dip, but they might not.

    Given that the a)American economy is fueled in large part by consumer spending, b) consumer spending is correlated with perceived wealth, and c) the majority of a homeowners wealth is in his or her home, lower home prices could be strongly recessionary.

    Given that scenario, the Fed might opt for even lower rates in an attempt to stimulate the economy.

    Or perhaps inflation worries will loom stronger in the Fed's mind that any growth worries, and the scenario outlined in this post will come to pass(certainly food and oil prices of recent months have been very worrying).

    But the point is it is nearly impossible to predict at this point, and a poor rationale for buying today.

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  2. Anonymous2:43 AM

    Of course you guys would like people to ignore the headlines, especially that Daily News article talking about double digit price declines in the SFV.

    Outside not accounting for higher property tax and the todays depreciation trend.. the article also ignores the issue of what happens if interest rates return to their historical norms off from todays historic lows. Try selling your overpriced 3/2 then.

    You want the lowest price possible so you keep your total housing cost low and maximize your chance that you will be able to sell it in the future.

    The real issue is that affordability is at historic lows, therefore volumes are at historic lows. Simple supply and demand. You want people to buy, get prices lower. You make your own rain.

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  3. So wrong, I'm not even sure where to start.

    1. Purchase price is $21,890 less. This means...

    2. Lower property taxes

    3. if you refinance at some point, less to finance

    4. if you pay extra on your mortgage your principal payments pay your mortgage off faster

    5. Your down payment is smaller

    In short, making decisions on monthly payments is not a good idea.

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  4. So finding a house that was reduced by a significant amount and interest rates are good may be an exception. Remember we don't buy homes for how they do in 1-2 years rather 5-7 or 7-10 years for an investment. I do think buying now is a smart thing to do if it's the right location, property and price and with so much to select from why not check it out.

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