Foreclosures
DEALS, MARKET BOTTOM AND BEST INTEREST RATES
The elements: There is, understandably, a desire on the part of the real estate buyer to “get a deal”, to “wait for the bottom of the market” before buying and to get “the lowest interest rate”.
Let us examine each of these elements in relation both to supply and demand and as they relate to one another.
“A deal”: It is probably safe to say that there really are no “deals” in real estate. If a property that sold for $600,000 in 2005 can be bought in 2008 for $425,000 that is scarcely a “deal”. Equally, if that same house is bought in 2008 for $425,000 it has caused two things to happen: first, it has become a comparable for the neighborhood, even if nearly-identical houses are listed at $500,000; second, it represents a milepost in the (currently) downward slide of prices, a kind of snapshot. It is neither an indication of the next month’s value nor of next year’s. Supply and demand will dictate all future prices of the now-$425,000 house.
Market bottom vs. Interest Rates: Ideally, a buyer can lock in a low interest rate, identify the point at which prices have fallen as far as they are going to and buy on that day. Only by coincidence can such a transaction take place since rates cannot be locked in for more than about 45 days and no reliable source exists for identifying the lowest price until surrounding prices start rising, that is, the “bottom of the market” can only be seen through the rear view mirror. What the thoughtful buyer can do is to make judgments about the direction of both pricing and interest rates and elect to optimize, never maximize, the tradeoff that exists between the two.
Here is a tradeoff example for a buyer who can pay no more that $1,550.00 per month toward principal and interest:
Interest Rate Monthly Payment Loan Amount
6.25%: $1,539.28 $250,000 (November 2008)
5.75% $1,546.33 $265,000 (December 2008)
4.75% $1,538.35 $295,000 (January 2009)
Bottom line: When the worst part of the price decline has past (say 35% from the peak) and the best estimates are that future decline will be modest (say 6% to 10%) and interest rates are at three-decade lows, it is better to buy now at the low interest rate, ride out the expected price decline and the following price appreciation.
NMC 01.06.08
