By Gregg Cohen
Great article below from The KCM Blog about the hidden costs of waiting for prices to fall…
As always, I’ll throw in my two cents at the bottom (and you should do the same in the comments box!)
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The Cost of Waiting for Prices to Fall
The cost of a house is made up of the price AND THE INTEREST RATE they will be paying. Two different pieces of news released yesterday highlight this point.
PRICES
The National Association of Realtors (NAR) released their 4th quarter housing research report. In the release, they reported that home sales rose 15.4% in the 4th quarter over the 3rd quarter. They also showed that prices remained stable during the year:
The national median existing single-family price was $170,600 in the fourth quarter, up 0.2 percent from $170,300 in the fourth quarter of 2009.
A buyer who delayed a purchase might find solace in the fact that prices have not increased. However, the other news released yesterday paints a different picture.
INTEREST RATES
The Primary Mortgage Market Survey was released by Freddie Mac which showed that the 30 year fixed rate mortgage was at 5.05%. Frank Nothaft, vice president and chief economist of Freddie Mac said:
“Long-term bond yields jumped on positive economic data reports, which placed upward pressure on mortgage rates this week…As a result, interest rates on a 30-year fixed-rate mortgage rose to the highest level since the last week in April 2010.”
So prices have remained stable but interest rates have risen dramatically in the last 90 days. What does that mean to a buyer looking to purchase a home this year?
The price is the same. It just costs more.
Let’s show you what the news means:
By sitting on the sidelines for the last 90 days a purchaser lost:
- $89.44 a month
- $1,073.28 a year
- $32,198.40 over the thirty year life of the mortgage
If you buy a $340,000 home, double all these numbers.
Bottom Line
Even if prices fall another 10% this year, the cost of a home will increase if interest rates go up more than 1%. Buyers should not worry where prices are going. They should be concerned where costs will be later in the year.
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Here’s my take:
I agree 100% with this article. As investors, we have to keep our sights focused on the end goal which is a return on our investment. Price is only one factor of the overall returns (and many times its the least important.) Many times investors let the emotion and thrill of “getting the best deal” corrupt their decision making process and, ultimately, their investments suffer.
What most investors don’t realize is that if you’re always looking for the absolute bottom of the market, it’s impossible for you to ever take action. That’s because you will never know for sure if you are in the bottom of the market. It’s always an insight gained on past historical data. And what’s your rate of return going to be if you never take action because you were always looking for the bottom? A big, fat 0%!
So, in order to give yourself the best chance of reaching your investment goals, you must make your investment decisions based on your expected ROI based on current market conditions. Don’t fall into the trap of always trying to get the best deal or else you’ll be sitting on the sidelines watching all the other investors who took action reach their financial goals!
JWB Real Estate Capital is one of the country’s largest home buying and residential redevelopment companies. In the past 5 years, this team has bought and sold close to 250 deals and is on pace to complete 120 deals in 2011. The team speaks nationally to crowds of thousands of real estate investors with their mentors, Than Merrill & Paul Esajian of A&E “Flip This House,” have been featured multiple times in the Florida Times-Union and the Jacksonville Business Journal, and were also members of the Board of Directors for Jaxreia from 2009 – 2010.
