0 Flares Filament.io 0 Flares ×

It’s always a balancing act in the crystal ball business

Just the other day I wrote in this blog that even if you believe sale prices are going lower, given that interest rates are sure to climb (the Fed can’t keep printing money forever without consequences), it may still be financially prudent to buy now versus waiting for prices to bottom.

First of all, are you really that good at predicting tops and bottoms in any market? Tell me, how’s your 401K doing? That will give you a clue as to your prognosticating abilities

Secondly let’s make a couple of assumptions using a couple of facts.

FACTS

Fact one: the median price of a home sold on the Palos Verdes Peninsula in the last 12 months was $1,133,425
Fact two: a 30 year fixed rate mortgage is around 4% right now (if you pay a point or so)

ASSUMPTIONS

Assumption one: Home prices will fall another 10% before they bottom, so now the median price of a home is $1,020,083
Assumption two: What with the Fed printing money, interest rates go up to 6% (historically still low, but higher than now)
Assumption three: You are injecting a 25% downpayment on your purchase

So what happened … by waiting, you saved $113,342 in the price of the home, but guess what, you ended up, even with a lower priced home and lower loan amount, actually paying $275,293 more in interest payments over 30 years for a net loss of $161,951.

Ahh, but I hear what you’re saying … “George, I’m not going to own this house for a full 30 years”. Ok, that makes sense, so what happens after just 10 years.

The results are not as dramatic, but you still lose money by paying a lower price assuming interest rates go up. Be honest, do you really think interest rates will stay this low? Look, I’m no better than anyone else at predicting the market. I’m just suggesting that if the right house comes on the market, negotiate hard for it, don’t wait. Own the home now at an interest rate you may never see again.