[See “Why the Fed’s Move Came as a Surprise” on updated rate commentary]
Here’s the broad picture: We are at or near the bottom of the current real estate cycle. Many buyers are hesitant and are holding off from buying a home because they do not think that the market has hit rock bottom yet. However, here’s the problem with that ideology: interest rates. While it is true that prices may fall another 2-3% ($6,000-$9,000 on a $300,000 house), if interest rates increase by 1% across the board, within 5 years you will have already paid more than you gained by waiting to purchase a house a lower price.
Who says rates will increase though? Wouldn’t that just hamper growth at the bottom of an economic market?
Yes and no. Refer to this quote from a USA Today Article entitled: Why you should lock in mortgage rates now.
Mortgage rates, which have been at historic lows for months, could shoot higher if lawmakers fail to reach an agreement to raise the debt ceiling by Tuesday, says Greg McBride, senior financial analyst for Bankrate.com.
In addition to turmoil over the debt ceiling, read this post on another indicators of interest rate increases. In short, inflation has been on a rise for 7 months now and is around 3.5%, up from 1.5% last year. Countries will often raise interest rates to combat inflation as general price increases hurt consumers considering that prices tend to increase faster and at a higher rate than wages can increase.
What’s the solution?
Here’s the bottom line. If you are in the market to buy a house, whether you bought two years ago, buy now, or will buy within the next 18 months, you will still be buying near the bottom of the real estate cycle. If you envision yourself being in your home for the long run, you will likely come out ahead. Let’s look at history: if someone asked you if you would like to buy a house in 1991 to sell it in 15 years, would you have bought the house? In 1991, most people would have said absolutely not because there were a lot of emotions left from the recent economic recession in 1989. However, between 1991 and 2006 prices skyrocketed to all time highs. Almost everyone who bought in the 90s and sold before 2007 made money.
And here’s the flip slide. If you bought in the early 90s (at the bottom of the market), you did not have to sell in the mid 2000’s. You can ride-out these real estate cycles. While it may be depressing to know that the equity in your house has gone down, you have not lost any money until you sell. And if you bought in the 90s and are hoping to sell for a profit, wait until the real estate cycle swings upwards again – as it historically does.
Articles Mentioned Above:
Why you should lock in mortgage rates now [USAToday]