I read a very informative post today by mortgage guru Jeff Belonger showing the relationship between interest rates and decline in property values.
A general rule (unless any of you mortgage experts are going to override my REALTOR math) is:
Any 1% rise in interest rates will completely offset any "potential" 10% decline in value.
Let's take a $300,000 sales price example.
20% down, 5% interest = $1,288.37 in principal and interest.
20% down, 6% interest = $1,438.92 in principal and interest.
Let's say the price drops 10% and the value is now $270,000.
20% down, 5% interest = $1,159.53 in principal and interest.
20% down, 6% interest = $1,295.03 in principal and interest.
So...you can see that a 300K home at 5% will cost you the same as a 270K at 6%.
Now...what do you think is the more immediate risk, a 10% drop in the time it takes you to buy a home or a potential rise of 1% in interest rates?
If I were a betting person, I would be much more concerned about the 1% rise in interest rates as that is going to affect my monthly payment every single month.
There is also an inverse relationship between interest rates and home values. The higher the interest rate, the lower the value.
Anyone who has followed interest rates over time knows what a .5-1% raise in interest rates can do to a monthly payment and even the broader market.
The moral of the story is: It is mostly futile to try and determine the bottom of the market. I have never met a person yet who can proactively time the top or bottom of a market, it is impossible to forecast. While one can get lucky, it's certainly not done by logic and data.
After all: When do you know when the bottom of the market has been reached?
The short answer is: You don't, until it starts going back up. Same with the stock market, same with the real estate market.
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