Is it a good time to buy a house? Is home price or interest rate more important?
Two different conditions of the market are most important for prospective buyers to either call their real estate agents or to put their search on hold.
The interest rates and home prices.
This is a difficult question to answer as of right now, most likely because we don’t know how long the current situation will continue and what will be the aftermath of it.
The number one factor is the duration of the crises. But as of right now, it looks unlikely that we will experience a nationwide housing decline on the scale of the one we saw in 2009.
The first impact is on your monthly payment.
Impact on Monthly Payment:
Option 1. If you decide to purchase a home that cost 100,000$ and interest rate at that moment is 6%. Your mortgage payment with 30 years fixed rate and a 20% down payment and closing cost will be 480$ per month.
Option 2. Or you’ve decided to wait another 6 months before you move forward with it and the interest rates went down to 4% but the price of the place already went up to 120,000$ If you put the same 20% down payment plus the closing cost and your mortgage payment will be 458$ this time on 96,000$ financed. Your payment will go down by $22.
But is the lower monthly payment worth it to make up for the higher down payment? After taking under consideration in that your down payment was $4,000 higher, you still save about $10 to $11 per month – around $3,920 for the 30 years loan. If the real estate prices had not risen in your targeted neighborhood from the $100,000 price point when you started and you had snagged a 4% interest rate, your monthly mortgage payment would have been $382.
The impact on the down payments
In this example when the home price went up from $100,000 to $120,000, your monthly payment went down because of a lower interest rate. But is the lower payment would actually help you if you didn’t have an extra $4,000 for the increased down payment?
The difference in the down payment could wave the ability of you buying the home you desire or taking you out of the buyer’s market altogether if you can’t locate a cheaper house in a different neighborhood. Also, losing that extra $4,000 will affect your ability to pay for unexpected home repairs, home renovation or desired kitchen remodeling, lower the amount of your emergency savings and removing your ability to afford to furnish your new home.
Coexistent Low Rates and Low Prices
How do you know when the rates are actually really low.
You can find history mortgage rates and housing prices here.
In 2012 interest rates and housing prices were both low when in comparison to the years before and following three to five years.
There are no guarantees that previous conditions will come again and create other low prices/low rates of the real estate market.
According to a Reuters’ poll homes market analysis in February 2019, U.S. home prices will increase at double the pace of inflation and wages in 2020. The supply of single-family homes is low and the rising demand, making the market less affordable. If you need a house soon, the option to wait for ideal housing conditions may not be realistic at all or may never come.
The HOA factor
Not every home you thinking of will be in a planned or gated community or condominium with an HOA. But if the home you want to buy has it, realize that HOA fees are often higher for pricier homes and can go up when more homes are vacant.
Why? What is HOA?
HOAs cover shared services such as lawn maintenance, building maintenance, clubhouses services, pools cleaning and maintaining, tennis courts and/or private streets.
When fewer homes have occupied the cost, HOA fees go up.
What is the benefit of it besides the services that are covered by it?
Their in house regulations are very strict about your home’s exterior condition is one of the most important parts of it. Potentially the price of your house will be preserved for a longer period of time than the surrounding neighborhoods without HOA.
It will maintain higher standards of living for it’s residents. The homes will look more upscale, streets will be cleaner; there won’t be any eye-catching obstacles on your block. For example, you won’t see your neighbor fixing their car on his driveway.
Every rule enforced in HOA guidelines is made for the purpose of increasing and maintaining the quality of living. That will keep higher prices for the homes in it for a longer period of time.
One downside will be, you may experience difficulties renovating your home when you are choosing a general contractor because the HOA may have some extra requirements even for a small work that needs to be done in your home like some carpentry, masonry, landscaping or simply kitchen remodeling.
Next option you always have even if you purchased a home with higher interest rates you can always refinance it and bring it to the current rates.
In the future, refinancing is an advantage of buying at a lower home price with a higher rate that you can adjust in the future when you compare it to having a lower but the home price will be higher. The issue with high initial interest rates can be adjusting it in the future if rates decrease. If your current house interest rate is way higher than current rates, ask potential loan officers how much it would cost to modify your rates. The range can be anywhere from a small fee to thousands. There are no assurances that home loan interest rates will drop, but you can make sure that you are able to refinance if they do.
If the home price is more important than the interest rate depends on your perspective. All real estate is local. This means whatever is happening in your local market in Stamford, for example, could vary from the market in Manhattan. It’s most likely impossible to predict the real estate market, but you can try to take advantage of the way the market moves. You can’t always predict how the market will move, but you can watch it goes up or down. In general, the rule of thumb is when interest rates go high, home prices go down to compensate, but not all the time. Here is a small example of home price vs interest rate with home price is variable between 192k to 240k and interest rates are variable between 4,5% and 6,5%
$240,000 X 80% at 4.5% interest equals a payment of $972.84
$226,260 X 80% at 5.0% interest equals a payment of $971.65
$214,062 X 80% at 5.5% interest equals a payment of $972.34
$202,500 X 80% at 6.0% interest equals a payment of $971.27
$192,188 X 80% at 6.5% interest equals a payment of $971.80
As you can see there is almost no difference in your monthly payment but you can see that a 2% increase in an interest rate would lose you around $50,000 of buying power in that price point. If you doubled the home price, you would lose around 100,000 of buying power for a 2% spread in interest.
This is why interest rates play a huge role for many homebuyers of a newly designed home or totally renovated home. If you are stretched too close to the top end of your price point and rates go up, you might not be able to purchase that dream home you want because you will no longer qualify for that price point. And, just so you know, making a lowball offer is not always the answer.
The Bottom Line
The decision to buy a home should always be driven mostly on your ability to be able to afford the monthly payment, initial payment, home renovation, and furnishings, while having enough left for saving.