Market Math for Buyers

Here are some interesting ways to look at real estate ownership in general and the idea of “market timing” as it applies to buying and selling. These are actually very traditional and timeless concepts, yet we seem to have lost sight of them in the frenzy of the market boom and the turmoil of the cyclical decline. It’s a good time to get back to the idea that homeownership is a long term investment, rather than a quick killing in the market.

Many would-be buyers, some of whom have been approved for a mortgage loan, are sitting on the sidelines waiting for the market bottom before making a move. It’s important to note that the only way to be sure about the bottom of a market is to wait until it has passed and the recovery has begun. It’s somewhat easier to know that a bottom is near, either in the near future or the recent past, and the risk of missing this window is lower.

Let’s say there’s a buyer who is looking at a $400K home, plans to put $80K down, and take out a loan for $320K at current interest rates of around 6%.  This person is worried that prices may drop another few percent and doesn’t want to risk paying too much. What this buyer should also consider is that interest rates are at very low levels and that they have nowhere to go but up, considering the economic realities of $125 oil and the eroding value of the dollar.

If this buyer decides that the housing market may decline another 3%, well that would be $12,000 in the case of the $400,000 home. But what if interest rates rise from the current 6% to a likely level of 7% during the same time that prices fall 3%? The mortgage payment (principal & interest) on a $320K loan at various interest rates is as follows:

$320K at 6%, amortized over 30 years, payment is $1918.56 per month.

$320K at 7%, amortized over 30 years, payment is $2128.97 per month.

$320K at 7.5%, amortized over 30 years, payment is $2237.49 per month.

If rates rise to 7%, it takes less than 5 years for the higher payments to eat up the $12K. If rates rise to 7.5%, it takes just 3 years. If prices rise gradually over the next 3-5 years, along with rates, was there ever a reason to wait?

If we look at housing as a place to live and a long term investment, there’s nothing to gain by waiting at this point in the market cycle.