Americans love their sports and many love their gambling. We like to take a little risk and win. There are a lot of home buyers out there sitting on the fence right now. They have been watching home prices fall for three years, and want to try and pick the bottom of the home price market. It's a numbers game with a lot of long term risk, in that a higher interest rate can wipe out home price savings many times over the life of the loan. Let's look at a home buyer who has a couple of prospects that, after a little bargaining, she thinks can be purchased for $250K. We're working with a conventional 20% down loan, and she wants to wait and see if home prices fall a little more before she takes the plunge.
First, let's look at the reality of the situation with an eye to volatility of home prices vs interest rates. The dramatic slide in home prices has slowed, almost at a standstill in many areas. Some indexes are showing that home price drops have slowed to below 6% at an annual rate. If we use that 6% number, that would average out to a half percent drop every month. They don't act like that, but it's a way to compare our numbers.
This isn't "higher math," and I'm not taking a very scientific approach, but these numbers give us a pretty good picture of what happens. Roughly, for every eighth of a point increase in interest rates with no change in home price, our payment will go up by about $15/month. Roughly, for about every one percent in home price decline with no change in interest rate, our payment goes down about $14/month. So, if you save 3% on the price of the home by waiting, it will only take a 3/8 point rise in the interest rate to wipe it out. Since our price drop could take three to six months to drop that 3%, which do you think is more likely to happen?
So, unless prices take off on the down side again, it looks like we may be taking on more risk, as interest rates can easily take off to the upside. But, we're in the city for gamblers, so you can always play the slots while you wait.