Wednesday, September 30, 2009

Real Estate - Is it time to buy?

by Kathryn Godby Oram

When the Real Estate Industry was hot everyone was an expert on the “market”. Home values were on everyone’s mind and we all watched in wonder as our homes gained thousands in value. Now, the “market” has suffered drastic losses and the world is again buzzing about Real Estate, but mainly to ponder where we go from here.

Over the past 18 months the Fed has actively supported the housing market by keeping rates low. Even more proactively, the Central Bank, has purchased the majority of Mortgage Backed Securities in 2009 effectively owning all of the mortgages written this year. So what happens when the Fed stops its unprecedented buying and the private sector comes back into the mortgage market? What happens when the Fed starts to raise interest rates back to historically normal levels? Mortgage rates will rise. If, therefore, you want to take advantage of some of the lowest rates on record, now is to the time to buy.

In general, when rates go up prices go down and conversely, when rates go down prices go up. Over the past 18 months prices and rates have gone down simultaneously. This is a phenomenon not to be dismissed. If you are waiting for the bottom of the market you may find yourself facing an affordability dilemma. Consider the following example. A $500,000.00 purchase with 20% down or $400,000 mortgage at current rates, 5.5% on a 30 year fixed would require a $2,271 monthly payment ($27,254 annually), Fast forward to the same home in the near future. Even if the value dropped an additional 20%, so the purchase price is now $400,000.00, an 80% mortgage of $320,000.00 with a rate of 8.5% on a 30 year fixed would require a $2,461 monthly payment ($29,526 annually). If prices hold or rise from here, the difference is even more profound. Record low rates, putting affordability at an all time high is the reason to buy now even if values have further to fall

Now
Value $500,000
Rate 5.50%
LTV 80%
Mortgage $400,000
Amo 30 yr
Payment $27,254
2,271
Ratio 0.068135

Drop/ Increase 20%

Later
Value $400,000
Rate 8.50%
LTV 80%
Mortgage $320,000
Amo 30 yr
Payment $29,526
$2,461
Ratio 0.09227

1 comment:

  1. very nice! I always wanted to find something like this .
    Thank you!

    ReplyDelete