Ellmaker Realty Blog

BUYERS! TIME TO BUY!`

Information provided by Ted C. Jones, PhD, Senior Vice
President—Chief Economist, Stewart Title Guaranty Company. --April
2009


Time to buy is RIGHT NOW!
U.S. home prices have declined across the nation in the past
year—albeit at varying levels. Latest national price declines range
from as little as 4.5 percent (Dallas, Texas) on a year-over-year
basis in February to as great as 35.2 percent (Phoenix, AZ) according
to S&P’s Case-Shiller Home Price Indices.

It is the anticipation by many prospective buyers for further home
price erosion that keeps them on the sidelines and from participating
in homeownership despite the lowest interest rates since Freddie Mac
commenced the statistical series in 1971.

While further price declines may be realized, the likelihood of
rising interest rates makes purchasing now a better option than
waiting for further potential value declines. Simply stated, there is
a greater possibility of interest rate increases than potential value
declines. Even with the price decline, the interest rate increase may
result in the buyer no longer being able to qualify for a loan on a
home they wish to purchase for which they qualify today. Despite
facing a potential in declining home values, now may be a better time
to buy.

To make the comparison simple, let’s assume a loan amount today of
$100,000 with a 30-year fixed-rate residential loan at 5 percent.
Nationwide at the time of this writing, the average 30-year rate was
4.85 percent per Freddie Mac.

A buyer today at 5 percent interest borrowing $100,000 has a monthly
principle and interest payment of $536.82. If prices decline 5
percent (and the loan amount does also) and interest rates rise just
½ of 1 percent, then the monthly payment remains the same ($539.40).

So if rates go up just 1 percent to 6 percent per year, then prices
must drop at least 10 percent for that same buyer to qualify for the
same monthly payment. A 1.5 percent increase in rates to 6.5 percent
requires a 15 percent price decline, and a 2 percent increase
necessitates a 20 percent price decline to qualify.

(Note: This 1 percent interest rate change to a 10 percent price
change is only true when interest rates are 5 percent as they are
today.)

Why will rates increase in the future more than prices decline?
Looking at the S&P’s Case-Shiller Home Price Indices, the aggregate
20-city prices have already declined 29.1 percent since peaking in
July 2006. For many cities, much of the price decline has already
taken place. And Austin has seen very little decline in the median
home price! And why will rates increase? Massive deficit spending has
a high potential to drive up inflation and hence interest rates.
Additionally, since these are the lowest rates since 1971, it’s not
hard to project the likelihood of rate increases.

So NOW may be the best time ever to buy a home and take advantage of
truly historic low interest rates!

Contact Craig Ellmaker at craig@austin-cashflow.com or at 512-784-1494

Published Friday, May 08, 2009 8:54 PM by Craig Ellmaker