Like a heartbeat, markets have a pulse. At times they are going up and at times they are going down. We have talked to many buyers who are trying to figure out the pulse of the current housing market. Their primary goal is to buy at the bottom of the market in price. The problem is that they are ignoring other variables that are just as important.
Price is only one component. There are other factors that buyers should pay attention to including interest rates, selection, neighborhood, future construction trends, both residential and commercial, and overall population growth. Let’s take a look at some of these and try and put them in context.
The problem with looking at median prices as a guide is real estate is local. While some neighborhoods are dropping others are doing well. Even with the decrease in total number of home sales for 2007, Los Angeles had a 3.7% increase in median home price rising to $560,000. Neighborhoods such as Studio City enjoyed a 10% increase in median price to $764,000 while others stayed flat or had minor decreases. Communities that were primarily used for second homes or those in transitional neighborhoods saw larger decreases.
However, buyers should be just as concerned with changing interest rates as they are with overall home prices. Our current interest rates remain at historically low figures (see Historical Interest Rates).
If you are buying a $560,000 home with 20% down at an interest rate of 6% the monthly payment for a 30 year fixed rate loan would be $ 2,685. To maintain the same monthly payment at an interest rate of $6.25% you would only be able to afford a home price of $545,297, a drop of $14,702 or 3% in buying power. At a 7% interest rate the home price you can afford lowers to $504,655, a drop of $55,345 or 10% in buying power.
How does population growth affect home prices? The city of Los Angeles is projecting a 17.5% population increase by 2030. If recent population and household trends continue in the future, by 2030 Los Angeles is projected to be home to 11.2 million residents. This represents a population increase of 1.7 million people.
While you might be reading about the end of the world in the housing market, let’s think about it realistically. The bubble wasn’t going to last forever and neither will a bust. There are communities that will take longer to recover. Short-term thinking in real estate only works in a quickly appreciating market. The kind of get rich quick mentality that hit the real estate industry is a primary contributor to our current market skepticism. If you are buying real estate as a short-term investment, you are going to have to work harder and do more research. If you are buying a long-term investment or are buying a home, then you have a great deal of choice and favorable interest rates.
The buyer that is looking for the absolute bottom in housing prices has a good chance of getting back into the market too late. No one knows when we will have hit the bottom of the market until prices have already started to rise. They also take the risk of lowering their overall buying power from rising interest rates.
When is the right time to buy? Currently, buyers have a large selection of homes to choose from, sellers have become more reasonable in their expectations, interest rates remain low, and overall population trends in the Los Angeles market are continuing to grow. The home that you have been waiting for is out there. Are you going to look for it now, while selection is strong and interest rates are low or are you going to wait until after the market has changed? Will you be saying, “Should of, would of, could of? “
To find out more information on real estate and mortgages check out our websites at www.geoffre.com and www.peterwolfre.com.
Westbrook Realty - Ada, MI
Grand Rapids MI Real Estate
Well written article about home prices, Peter. Welcome to Active Rain - I think you will like it here.
Mar 29, 2008 06:27 AM
Coldwell Banker - Studio City, CA
So many people forget the historical perspective of where interest rates have been in the past. The Historical Interest Rate chart shows rates since the 70's.
Mar 29, 2008 09:45 AM
Utah Homes - Alpine, UT
New House Utah - Utah Hero Homes
I've long believed that no one knows the bottom of the market. Such information will be available when a bunch of number crunches look at the cycle and then points back to some place in time where the bottom was reached. By then, the wise (due-diligence performing) speculators will have already purchased the prime properties. In other words... when there are declines the investors are already salivating. We're currently in that stage.
Apr 16, 2008 01:29 PM
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