Should You Consider Buying Now?

It seems as if there is an article about the impending crash of the housing market every day in every form of the media. Usually these articles are on the front page of the paper or the headline for the evening news. However if you read the business section of the paper or the financial news most economists are predicting that while prices are stabilizing and in some cases declining there may not be a CRASH just a long slow leveling of prices.
The FED has chosen not to raise rates for a few months and there is speculation that they may decrease rates by 1/4 point in October or November. Last week the government issued new guidelines to lenders about interest only and adjustable loans which are meant to reduce risk faced by prospective borrowers.

I believe interest rates drive the market more then most people realize. Over the last few years rates were historically low and prices really surged. The market was definitely ready for an adjustment period. I think the rise in rates helped accelerate the market slowdown. If rates increase 1%; prices must fall between 8-10% to meet the increase in the rate..... 3 months ago jumbo fixed rates were around 6.75% moving toward 7%... if the FED had kept raising rates they would have been over 7%.
For the most part, prices seem to be stabilizing rather then crash diving. You may see a property originally listed at $1,050,000 now at $985,000; but chances are the property should have been listed at $1,000,000 and the price is now adjusting to the real market value. The price has declined but not by 10-20%. Let's look at how rates can impact prices.

Let's say you are looking at a home price of $600,000 with 10% down and a loan of $540,000 @ 6.2% (current rate)the P+I payment would be $3308. If the rates rise 1% to 7.2%, in order to keep same monthly payment, prices have to drop 8-10%.. that same house would need the price to decline from $600,000 to $542,000 with a loan of $488,000 which would be $3309 P+I at 7.2 % that's about 9% price decline.
If prices stay flat and rates increase,a house priced at $600,000 with loan of $540,000 and a rate of 7.2% has a payment that jumps from $3308 to $3663. At 7.5% the payment jumps to $3752. It doesn't take much of an increase to really impact a mortgage payment.

That's why I believe the next few months may provide a window of opportunity for anyone thinking of buying before the end of the year. People who have their homes on the market at this time of year are usually very motivated or they wouldn't put up with the hassle of showing a home over the holidays... so low rates and motivated sellers might be a winning combination.

So why should you think about buying instead of waiting for prices to drop? Why shouldn't you continue to rent until prices drop? What if prices don't decline as much as you want and rates increase? When you rent you are paying someone else's mortgage payment. You don't get a tax benefit or any chance of equity building if you rent. Home prices and rents go up and down but if you get a loan that is fixed, at an affordable rate, you can ride out the ups and down of the California real estate market without spending too much time worrying about your blood pressure.