Today interest rates sit at 4.5% for 30 year mortgages. This represents the lowest financing environment since the early 1970’s. Combine that statistic with the large number of foreclosures available on the market and consumers could be looking at the best time to buy real estate in the last 50 years.
The Current Real Estate Environment
Very few neighborhoods escaped the real estate crisis without a single foreclosure. Additionally, many neighborhoods are so overrun with foreclosures that municipalities are simply tearing homes down. Savvy consumers understand that foreclosures price 20-30% below market pricing in most markets, so they start their shopping with those homes at the top of the list.
In many locations, potential buyers can shop new construction or find places less than 10 years old due to the rapid price inflation over the past three years. These homes should have very few deferred maintenance issues and come equipped with many modern amenities.
The Real Estate Metrics
Too often, homeowners simply look at the price of the property and view the financing of their home as an afterthought. The purchase price and the financing should go hand and hand. For example, in the current environment, a homeowner can secure a 30-year mortgage at 4.5% for a $250,000 home. The homeowner will pay approximately $1,270 per month. At an interest rate of 6.5%, the monthly payment jumps to $1,580. A 2.0% increase in the interest rate, raises the monthly payment $310 in this example. For many consumers, that would represent a car payment or enough money to pay all of their utilities.
Real Estate Risk vs. Interest Rate Risk
Consumers must decide which risk they fear more, interest rates rising or real estate values falling. If real estate values continue to decline, consumers should expect interest rates to remain depressed. However, as real estate values rise (even modestly) consumers should expect interest rates to climb. Locking in a 4.5% interest rate for 30 years, might be more valuable than a 10% or even 20% decline in price.
Consumers can be sure that by buying real estate today, they are buying much closer to the bottom of the market than they are to the top. Additionally, consumers buying foreclosed properties at record low interest rates provide themselves an even bigger cushion.
The question is not whether or not buying today makes sense. Given the low interest rate environment and depressed pricing level, it would be very hard to make a bad investment. The issue, of course, is do consumers have the ability to buy today? If they did, the dynamics of the market and interest rates would be different. For the select few, who have the choice of whether to buy today or wait for an even better market, the downside risk are about as low as they have ever been. For people with the means, now is definitely the time to buy.
Michael Cook - Michael Cook is currently a Real Estate Investment Banker for Wachovia. He and his partnerstarted their own real estate investment ...
