Is it Time to Buy Real Estate NOW?

December 2010

Have we hit the bottom? Will I do better waiting? These are questions that potential buyers like yourselves are dealing with everyday. I’ve heard these people say that prices may go lower so they are waiting on the bottom to get the very best deal possible. I’ve heard others say that now is the time to buy because prices have fallen so much.

It is definitely a personal decision that everyone needs to make on their own because it’s one of the biggest, if not the biggest, financial decision that people make in their lifetime. The media might say that it’s the worst housing market ever and now isn’t the time to buy. Your realtor might say that now is the best time to buy. The average consumer needs to know the facts and decide for themselves based on their own financial situation. To make a blanket statement that “now is the best time to buy” is not true for everyone. If you just lost your job, now isn’t the time to buy. Conversely, if you just came into a windfall of money, now is the best time to buy.

With any decision, you need to know all the facts. I’m going to provide you with the facts so you can make an informed decision based upon your own financial situation.

There are 2 factors to consider when determining the best time to purchase real estate – the price of the home and the monthly payment. If you’ve ever purchased an automobile, the salesman always wants to know how much you can make in monthly payments not how much you want to pay for the car. In real estate, it’s important to know both. The monthly payments affect your current financial situation and the price that you pay for the home affects the long term outcome of your decision.

As you know, home prices have dropped significantly in Southwest Florida. Interest rates have also dropped and the government is willing to give you free money if you are a first time home buyer (defined as a person that has not owned a primary residence in the last 3 years). The drop in home prices follows several years of artificial increases in prices. In other words, home prices were inflated and were destined to fall. This is what happens in our roller coaster like real estate market.

Historically, the average yearly increase in real estate values is estimated to be about 2 to 3% nationwide. In parts of Lee County, we’ve experienced an increase of over 40% in one year and a decrease of over 28% in another year. Both of these are artifical and not sustainable on a long term basis.

Another factor to consider is replacement value. As you know, builders have stopped building homes. Why is this? The reason is that the prices that people are willing to pay for homes now is less than the builders can build them for. Builders would be jumping into the market if they could make a profit but the reality is they can’t. This is also not sustainable. We can’t go for long periods of time without new construction especially in Lee County where we have so much vacant land. Builders will once again start to build and when they do, prices will have risen from today’s levels. Those that buy today will see their investment grow in value once builders begin building again.

Having said all this, what does it mean to me and how can I see how this affects home prices and monthly mortgage payments? I’ve put together the chart below that details home prices and the associated monthly payments at various fixed interest rates. The current average fixed interest rate is at 5.2% and rising. This is for “A” borrowers or those with credit scores of at least 780 and enough income to support the payments. It’s hard to remember that in August 2008, the average fixed interest rate was at 7%.



Effects of Inflation on Monthly House Payments
Home Price 4% 5% 6% 7% 8% 9%
$80,000 $381.93 $429.46 $479.64 $532.24 $587.01 $643.70
$85,000 $405.80 $456.30 $509.62 $565.51 $623.70 $683.93
$90,000 $429.67 $483.14 $539.60 $598.77 $660.39 $724.16
$95,000 $453.54 $509.98 $569.57 $632.04 $697.08 $764.39
$100,000 $477.42 $536.82 $599.55 $665.30 $733.76 $804.62
$105,000 $501.29 $563.66 $629.53 $698.57 $770.45 $844.85
$110,000 $525.16 $590.50 $659.51 $731.83 $807.14 $885.08
$115,000 $549.03 $617.34 $689.48 $765.10 $843.83 $925.32
$120,000 $572.90 $644.19 $719.46 $798.36 $880.52 $965.55
$125,000 $596.77 $671.03 $749.44 $831.63 $917.21 $1,005.78
$150,000 $716.12 $805.23 $899.33 $997.95 $1,100.65 $1,206.93
$200,000 $954.83 $1,073.64 $1,199.10 $1,330.60 $1,467.53 $1,609.25


Let’s just take an one example in the chart of a home that sells for $100,000 today. Let’s also say that we can finance 100% of the purchase which we all know is not true but easy for illustration purposes. If we can secure a 5% fixed rate mortgage, the monthly payment is $536.82. These figures are just for the mortgage only and don’t include taxes and insurance. Let’s say that a builder could build that same house on the same lot for $125,000. This would mean that when they start building again, people that purchase a new home in your area will be paying $671.03 for the same house. That’s $134.21 more than you are paying. Your house has also increased in value and you now have an increase of roughly $25,000 in equity. I hope this all makes sense because now we’re going to add another twist.

Most of you know that our current interest rates are among the lowest in history. The lower the interest rate, the more house you can afford. Now that prices have gone down so much and interest rates are very low, it’s a great time to buy if you’re in a position financially to do so.

Everyone has heard about inflation before. The last bad bout of inflation the US had was in the 80’s when mortgage interest rates were up over 17%. Imagine paying that today! Well, low interest rates are also artifical and can’t be sustainable. They will be going up. Some experts feel that we will see rising long term interest rates as soon as 3 months from now.

Let’s look at how this affects you. If you could afford a $100,000 home today at 5% interest rate with a monthly payment of $536.82, how much home could you afford if interest rates were to rise to 7%? Well, the answer is about $80,000. WOW! You’ve just lost $20,000 of buying power just because interest rates went up 2 points.

They say timing is everything. If prices were to go down an additional 10% but interest rates went up 2 points, would this help or hurt you? Take the $100,000 home today and at a 10% decrease in price that home is now worth $90,000. If you buy it at $90,000 and the interest rates have gone up from 5% to 7%, your monthly payment is now $598.77. That’s an increase of $61.95 monthly. Yes, you still paid less for your home but the question is: can you afford to purchase that same home with the increased payments? You might have priced yourself out of buying because you waited.

The facts are that prices are artifically low now. Interest rates are artifically low now. More people can afford to purchase a home now in Southwest Florida than in the past 5 years. Prices will go up! Interest rates are going up! Now that you know the facts, “How are you going to take advantage of this artifical situation?”

Ask me about never lived in homes with fixed interest rates of 5% in Cape Coral and Lehigh Acres.