Charles Dickens spoke of the 'best of times' and the 'worst of times. For my part, I think they're the former. :)
As can be readily seen by all, the steady stream of grim economic news items over the past few months has had a negative impact on the stock market.
The downgrading of the Dow-Jones Industrial Average (DJIA) has sent many skittish investors seeking a safe haven in the bond market. With this daily see-sawing in the markets, the popularity of the bonds has sent mortgage interest rates into record-low territory.
In our local marketplace, the 30-year mortgage rate has drifted between 3.875 to 4.125%. (The 15-year mortgage rates are in the low 3% range.) What does this mean to the average home-buyer? It simply translates into a savings of approximately $100/month on a $150,000 home purchase.
The other question is: Why does this matter? Quite simply, we are seeing the 'Perfect Storm' in the real estate industry.
In July 2007, our local marketplace peaked and has been headed south. At this point, it appears that we're nearing the bottom of the pricing trough, being that the prices have finally been seeing single-digit, rather than double-digit, declines which were prevalent in the previous years of this recession.
In many areas, these price declines have erased all of the gains of the previous decade! As such, the prices of real estate in much of our marketplace are now at par with those of 2001.
The combination of prices at a 10-year low, and interest rates at an historic low, makes for the perfect conditions for prospective home purchasers. For those who are willing to jump into the buying market, they'll find opportunities which have never existed during their lifetimes!
From 1987 to 1991, the market price conditions were very similar to what we're seeing now, inasmuch as the prices had plunged from a peak to a new trough. The primary difference at that time was the prevailing rates of interest.
In 1991, I vividly recall sitting down with a client who was purchasing a home, and who had procured an astounding, bargain interest rate. What was that rate? It was ONLY 9.5%! This was the best interest rate I had seen on a newly procured loan for several years!
To give a little bit of real-life perspective, in 1988, we purchased a home for $58,500 with an FHA loan at 11%. The principal and interest (PI) payment of this loan was approximately $557/month. Today, that same home would sell for about $140,000; however, with an FHA loan of approximately 3.875%, the payment (PI) today would be only $658.
One might say: Well, things aren't as good as they were then, because the payment has gone up about $100/month since that time. While it is true that the payment has increased about $100/month; however, it is important to look at the inflation adjusted amount - which has actually DECREASED significantly.
What I mean is that most wages have increased by approximately 100% since 1988, though the comparative house payment in this example has increased by only 18%.
For this reason, it seems to me that housing is actually more affordable now than it has ever been during my adult life. As such, this is my definition of the Perfect Storm for prospective home purchasers.
This is not a 'storm' from which one need take cover; rather, it would behoove all who are sitting on the sidelines to jump in with both feet and get wet!
Ciao for niao. :)
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