Avante Real Estate – East Bay Real Estate Blog

East Bay Blog

March 20th, 2008 7:24 PM

I read a very interesting article this last week regarding real estate. The article was in last week's issue of Time magazine. It is entitled "Ignore the Headlines" by Dan Kadlec. It echoes a lot of the things that I have been blogging about over the last several months. The essence of the article is that now is a great time to invest. The article talks about stocks as well, but addresses real estate specifically. Prices are down significantly, and although it is a real possibility that they could continue to drop, moves by the markets will wipe out any price decrease with an increase in interest rates.

The Fed has been making a lot of moves lately to try to stimulate the economy, especially with all of the recent developments. Most recently with the near failure of Bear Stearns, the Fed lowered the Fed Funds rate by 0.75%. One of the biggest one time moves in recent memory. Although there is no direct link between mortgage rates and the Fed Funds rate, it will still have the indirect effect of lowering mortgage rates. The Fed can not make the same mistake it made last time of keeping rates low for too long. Many blame that for our current problems. Once the economy begins to stabilize and recover, you can bet that the Fed will begin to raise rates again. Once most people decide that it is a better time to invest in real estate, two things will already have happened:

1. You'll have competition. When you realize that the market has recovered and it is a good time to get back in so will everyone else. Currently buyers hold the advantage in negotiations, that is because of the lack of other buyers competing and the surplus of homes for sale on the market. You can bet that once sellers see more buyers walking through there homes, they won't be as willing to take a lower price.

2. Once we recover you will see interest rates rise and this will wipe out any benefit you may have gained by waiting. Here is an example of a home purchase now, and in one year:

Today

$218,900 (put 20% down/30 year fixed)

5.5% interest rate

$994.31 monthly payment

Cost in 12 Months?

$197,010 (If price drops an additional 10%)

6% interest rate (recession ends, Fed raises rates)

$994.94 monthly payment

After waiting a year, and assuming that the market continued to move down you would still spend the same amount of money per month because as we recover the Fed will begin to raise rates. By waiting a year you saved nothing and ended up living a year somewhere you would rather not have been. Further, this assumes that the real estate market continues to drop.

The point of that article and the point that I have been making over the last several months is that if you are considering looking into buying a home, now could be the perfect time. As always, these are my opinions, until next time...

Posted by Ted & Lucy Ramos on March 20th, 2008 7:24 PMPost a Comment (0)