Buying A Home In Real Estate Market With Rising Prices

Added March 12, 2004 by Ilyce R. Glink

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Summary: When home prices rise in the real estate market you as a home buyer may be wondering if it is the right time to buy a home. Will home prices fall enough later on to make a home more affordable? When buying a home you should consider market inflation and interest rates.

Q: My wife and I, along with our two young children, are moving to the northern Virginia area from Boston. I've accepted a government job in Washington, D.C. Unfortunately I noticed that real estate is as hot in the D.C. area as it is in Boston.

Since housing prices tend to see-saw a bit here, is it wise to wait until the housing market cools off? I've noticed that what often makes the housing market cool off are rising interest rates.

Here's what I was thinking. Let's say I purchase a home right now in the D.C. area. I borrow $300,000 for 30 years at an interest rate of 5.5 percent. That makes my monthly payment about $1,703.

Let's say I wait a couple of years and the 30-year rate goes up to 7.5 percent, but the price of the house now falls to $275,000 because of the cooler market brought on by the higher interest rates. My monthly payment would actually rise to $1,922!

Why on earth would anyone in their right mind wait for the housing market to cool? Have I missed something here?

A: I think you haven't missed much.

The only thing you've missed is that when a housing market cools it doesn't necessarily mean that the property falls in value. In fact, in a strong market, where prices are rising at 5 percent per year, the $300,000 property would actually be worth $330,750 in two years. In a cool market, the property might rise only 2.5 percent per year, or to about $315,000.

In your example, that would mean that you'd be paying a higher interest rate on property that has actually appreciated (albeit slowly) in value, with monthly payments of $2,202, or $500 per month more than if you had purchased the property initially.

Even if the property doesn't appreciate at all over two years, but stays priced at $300,000, you'd still be paying more by waiting (plus, you wouldn't have two years of enforced savings through making principal payments each month on the mortgage).

In the real world, real estate markets don't generally react with a price decrease when interest rates rise. What generally happens is that the process slows down. Properties sell for the same, or nearly the same, amount, but it might take 6 months or a year instead of 6 days.

The only time in recent memory the value of homes plummeted enough to make waiting a good idea was when the housing market collapsed in the Northeast and southern California in the late 1980s.

The bottom line is, if you know where you want to live and can afford to buy a home, thereÃ¢â‚¬â„¢s no reason to wait. If I were you, I'd take full advantage of these historically low interest rates and find a place to plant down some roots in your new home city.

March 12, 2004.

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