April 3, 2008
Here’s why to Buy Now
An Expert says - it’s the Interest Rate
This story made a splash around the internet- it’s an interesting take on the timing of your purchase. I’ve been sitting on it for a while because I had some doubts. It is a fresh approach so I think it’s worth a look. According to Dan Kadlec of Time Magazine (Feb 25) you can buy today and not lose money even if the value of the house drops 10% in the next year. The secret is in the interest rate. Look at what happens with a home priced at $218,900 today with 20% down and a fixed 30 year loan at 5.5%; and compare to the same home whose value has dropped 10% after a year:
Price Down Payment Rate Payment $218,900 $43,780 5.5% $994.31 $197,010 $39,402 6% $994.94
The interest rate in this projection has risen as the recession fades and the Fed adjusts rates. You’ve waited a year in a home you don’t want, and you haven’t saved a dollar! Lots of Realtor websites jumped in and agreed with Time- BUY NOW is the thing to do. It’s simple math, easy for anyone to understand. Or is it? Read on…
Here’s a condo selling for around $200,000
Let’s look at some other $200k properties in the table below. Could you buy one today at the same total cost as it would be a year later?
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Does timing your purchase have to be a gamble?
…Or can we take control of our future?
That was February’s Time and the story has changed. When you look at the story at their web site today you will note a curious discrepancy: there is no table and it seems some facts were wrong. Intrepid Adam Marquis crunched the numbers and came up with this chart summarizing his conclusion:
Price Down Payment Rate Payment $218,900 $43,780 5.5% $994.31 $197,010 $43,780 6% $918.69
Well now, that’s very different! I didn’t do the math, but from the start I was uncomfortable about the assumptions in the original story. It looks bad as we consider the updated figures, but there is something of value here. It’s a fairly simple matter for us to crunch our own numbers; make our own assumptions about price and interest movement. We may find that this IS the time to buy in certain situations. That’s what Redfin is all about- giving everyone the tools to take control of their own homeownership plans.
[data from generally reliable sources, please comment on any errors!]
Red said:
The monthly payment is NOT the cost of a home, and the belief that it is, is a major reason we are in this mess. The worst cases are the homes sold with the “payment Option” loan, or the “builder buy down” loans. Inflate the value of the home by $100000 but keep the payment the same, sounds OK; but try to sell or refinance or handle the rate adjustment and you find yourself $100,000 in the hole.
The best time to buy is when the horrible interest rates have driven the prices of homes to pathetic lows, and no one can afford the monthly costs. NOT when the low interest rates have driven the buying frenzy to exotic prices that will not be seen again for 10 years, and no one can afford the monthly costs….
April 4, 2008 2:34 PM
Tom Swell said:
interesting… anyone else care to comment?
April 5, 2008 12:04 AM
Poe said:
I agree with Red in that monthly payments are not the same as the cost of the home. We are in this mess not because of that though–we are in this mess because people dont know how to handle their money. Thats the root cause. I myself have payment “Option ARM” (aka NegAm) but signed up for it with a reason in mind: I take the saving I experience every month (because Option ARMs payments are much lower than regular mortgage payments) and put it into a conservative investment vehicle. Its done quite well for me and I have a significant stockpile now. I look at it as a trickle out version of a HELOC. Mostly because I am giving up equity and adding a small amount to my mortgage every month (in a HELOC you add another big mortgage). But its better because I have cash and not a line of credit from a bank.
April 5, 2008 4:34 PM