Why waiting to buy because of price is a bad idea

If you know someone thinking of buying a home in Tacoma but "waiting for prices to fall some more," be a hero and show her these figures!

"I'd be crazy to buy when prices are falling . . . " she might have said. Her logic is unsound (unless she is a gambler). 

Here's an example. If a buyer were to purchase a $300,000 home today (1) with 20% down:

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If the buyer waited for prices to drop AND IF the buyer gets luck and prices drop 6% (2), BUT in the meantime the interest rates increase to their 10-year average of 6.25%, would our buyer be ahead or not?

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THIS IS WHAT HAPPENS:

• MONTHLY PAYMENTS INCREASE BY $173 / month
• 5-YEAR INCREASED PAYMENT COST: $10,380
• 5-YEAR INCREASED INTEREST COST: $16,507

After only 4.3 years, EVERYTHING gained by waiting (if indeed prices did drop) would be swallowed up in additional interest costs, AND these additional losses will continue through the balance of the 30-year loan.

Willing to gamble that interest rates will remain at this record post-WWII low AND that houses will decrease? The odds don't look very good!

(1) Current interest rates calculated at 4.5% with 20% down payment

(2) 6% price reduction to $282,000 with 20% down = $225,600 mortgage

What's good about falling home prices?

Would you be comforted to know that you might lose most of your home equity in the coming year? Would you be better able to plan? Here is a surprising opinion from the Center for Economic and Policy Research.


Home prices could be stabilized by lowering them further, a report from the think-tank Center for Economic and Policy Research suggests.

The proposal calls for 20 percent to 30 percent price cuts in the priciest markets, driven by restrictions on lending by Fannie Mae and Freddie Mac.

The center proposes that Fannie and Freddie use rent-based appraisals, saying that drastic declines would protect future homebuyers from paying “bubble-inflated prices on which they will subsequently lose money.”

What about current homeowners facing big drops in home value and wealth? “If homeowners will lose most of their home equity over the next year, it is better that they recognize this fact as soon as possible so that they can adjust their behavior accordingly,” the report says.

Source: U.S. News & World Report (12/03/2008)