Jonathan Bagg of THE BAGG GROUP has noted that some home buyers are sitting on the sidelines waiting for housing prices to hit bottom. It makes sense to buy a house at the lowest price possible but there are other critical considerations to keep in mind. Trying to time the bottom of any market is always difficult. Also, interest rates are at historic lows, and many home buyers fail to consider the savings that come with low interest rates, particularly over the life of the loan, or even the partial life of the loan.
Mortgage rates are low because of the recession and foreclosures. In addition, the Federal Reserve has moved aggressively to push down mortgage rates by buying as much as $1.75 trillion of housing debt and Treasuries this year. This policy has been successful. Rates on 15-year and 30-year fixed-rate mortgages are hovering at historic lows.
What does this mean for you? On a 30-year fixed-rate loan amount of $200,000 at 5%, the interest paid over the life of the loan is $186,512. That brings the total loan payments to $386,512. At 6%, the amount of interest paid rises to $231,676, a 24% increase. At 7%, it's $279,018, a 49% increase. The lesson here: Keep in mind, what might be gained from a further drop in housing prices could easily be lost by a rise in interest rates.
With regards to the market, let's review some recent indicators. The absorption rate, or months supply of homes available for sale based upon monthly sales, has been improving since March. On a county wide basis, the number of months supply of inventory June of 2008 was 21 months versus 11.5 months for June 2009. During the same monthly period, the average price of homes sold from June of 2008 to June of 2009 declined by 23%. Existing home unit sales rose 21% for the first half of the year with some homes, once again, receiving multiple offers.
And the most recent Standard & Poor's/Case-Shiller 20-city housing price index shows the month-to-month decline in housing prices has stalled from 2.8% in January to February, 2.2% in February to March and 0.6% in March to April. This has led many industry experts to anticipate that soon the decline in housing prices will bottom out.
Assuming this housing cycle compares to past cycles, as the number of homes available for sale declines, price will stabilize and eventually begin to rise in value.
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