Recently a guy asked me whether I thought he should buy a house. In the process of attempting to provide him with an answer, what occurred to me was that there is more than simply price that is important in terms of the purchase of a house. Interest rates are easily as important if not more important IF you will be financing the house...which is true for most of us.
What seems to be talked about here ad infinitum is the idea that 1) there is a bubble and 2) once the bubble bursts prices will go down.
Let's assume that's true for a moment. Let's assume that a guy buys a house today for $200,000 and finances it all at 5.5% for 30 years. The downpayment will be unimportant at this point for our analysis. The principal and interest payment on the above terms is $1135.58 per month. Taxes and insurance will be consistent within the examples I use. Now fast forward to exactly 10 years from today. You have made each payment on a timely basis, and therefore your loan balance at this time is $165,081.
The next example we shrewdly realize there is a bubble, that prices are about to fall. We turn out to be correct. Prices decline 10% over the next two years, so that 2 years from now we finance the house for $180,000. The rates in the interim rose (it was part of the reason prices declined). And therefore the interest rate on 30 year mortgages is now 8%. Thus the prinicipal and interest payment would be $1320.78. Yikes! The payment is nearly $200 more, eventhough we are financing less. Again, downpayment, taxes, and insurance are all the same. Now fast forward to 8 years from now....in other words, we are going to compare where we stand in 8 years with where we would have stood had we bought the house 2 years earlier at a higher price. Looking at the amortization schedule, the loan balance is $163,831.
In other words, in example one we buy the house, which then immediately declines 10%. In example two, we buy the house 2 years from now after the decline of 10% has taken place, but at a higher interest rate of 8%, the reason prices declined. Yet the loan balance is nearly the same, and in example one we save nearly $200 over example two on a month basis. In excess of $2K per year. In the 8 years that each example holds the house example one saves $16K over example two, even though he paid $20K more for the house.
You tell me which buyer got the better deal. The first buyer paid too much, but got the better interest rate. Buyer two got the better price, but paid more in payment, and will pay more for the life of the loan. Loan balances are very similar at the 10 year period.
Now, understand this is just one scenario. But understand that there are two components in the home purchase.....one is the price of the house, the other is the interest rate. And the interest rate can easily overcome some disadvantage in price if the rate is much different.
The point is, put the pencil to some of the scenarios. You may be surprised, especially if you plan to hold the property for let's say a 10 year period.
OldTrader
What seems to be talked about here ad infinitum is the idea that 1) there is a bubble and 2) once the bubble bursts prices will go down.
Let's assume that's true for a moment. Let's assume that a guy buys a house today for $200,000 and finances it all at 5.5% for 30 years. The downpayment will be unimportant at this point for our analysis. The principal and interest payment on the above terms is $1135.58 per month. Taxes and insurance will be consistent within the examples I use. Now fast forward to exactly 10 years from today. You have made each payment on a timely basis, and therefore your loan balance at this time is $165,081.
The next example we shrewdly realize there is a bubble, that prices are about to fall. We turn out to be correct. Prices decline 10% over the next two years, so that 2 years from now we finance the house for $180,000. The rates in the interim rose (it was part of the reason prices declined). And therefore the interest rate on 30 year mortgages is now 8%. Thus the prinicipal and interest payment would be $1320.78. Yikes! The payment is nearly $200 more, eventhough we are financing less. Again, downpayment, taxes, and insurance are all the same. Now fast forward to 8 years from now....in other words, we are going to compare where we stand in 8 years with where we would have stood had we bought the house 2 years earlier at a higher price. Looking at the amortization schedule, the loan balance is $163,831.
In other words, in example one we buy the house, which then immediately declines 10%. In example two, we buy the house 2 years from now after the decline of 10% has taken place, but at a higher interest rate of 8%, the reason prices declined. Yet the loan balance is nearly the same, and in example one we save nearly $200 over example two on a month basis. In excess of $2K per year. In the 8 years that each example holds the house example one saves $16K over example two, even though he paid $20K more for the house.
You tell me which buyer got the better deal. The first buyer paid too much, but got the better interest rate. Buyer two got the better price, but paid more in payment, and will pay more for the life of the loan. Loan balances are very similar at the 10 year period.
Now, understand this is just one scenario. But understand that there are two components in the home purchase.....one is the price of the house, the other is the interest rate. And the interest rate can easily overcome some disadvantage in price if the rate is much different.
The point is, put the pencil to some of the scenarios. You may be surprised, especially if you plan to hold the property for let's say a 10 year period.
OldTrader