Real Estate Values: A Buy Now Scenerio for Home Buyers: Historically Low Mortgage Interest Rates

Posted by david on Jul 13, 2010. Leave a Comment

When thinking of buying real estate, which market would you rather be in? A Buyer’s market or a Seller’s market? Not too difficult to figure is it?

When looking to buy a home in a seller’s market, a home buyer may experience a shortage of available homes to look at, may have to compete with other buyers interested in the same home and may be in situations where there are multiple contract offers from home buyers interested in the same home resulting in bidding wars among buyers and higher sale prices. In a market such as that, buyer demand exceeds available home inventory, listing days on the market begin to drop and asking prices begin to increase. And there have been various real estate markets like this in the past 38 years when mortgage interest rates were no where near historic lows! Economics 101, supply and demand, at its finest!

The fact of the matter is that the real estate market began to change in earlty 2006. Listing inventory stayed on the market longer as there were fewer home buyers. Buyers became hesitant and were no longer anxious to meet home owner’s asking prices or counter offers. Real estate values began to stabilize, and then started to drop. And they have continued to drop, creating an ideal opportunity and the perfect real estate market for all type of buyers.

I cannot remember a real estate market in the 38 plus years I am selling real estate where mortgage interest rates are at levels of creating new historic lows and real estate values have dropped as substantially as they have! Over the years I have been selling real estate, I have often been asked home buyers when looking to purchase,  “what do you think this home will be worth 5 years from now” or “how much appreciation can I expect if I sell it in 5 years”. Reasonable questions to be asked by a home buyer.

My answers were always the same. It depends. It depends are on the current market when you will be selling, it depends on the mortgage interest rates, it depends on the economy and the financial markets, it depends on the  the job market, it depends on national events, it depends on local market conditions, it depends on what improvements you’ve made or didn’t make to the home. It just depends on so many things!

However, back in 2006 and 2007 when I answered that question when asked, never did I think that the drop in real estate values would have been as severe as they have been, especially since high mortgage interest rates were not a factor and did not enter the scenario. Likewise, I could have never believed that my technolgy stock profile would drop as severe as it did after the stock boom in 2000. But it has.

Why is the current real estate market a buy now scenario for home buyers? Two important reasons: Mortgage Interest Rates and Favorable Home Prices!
   * Mortgage Interest Rates: Take a look at the 5 Year History of Average Mortgage Interest Rates!                                                              

Mortgage interest rates are at or near 40 year historic levels! The questions is, how long can they stay at these levels? The funny thing is that we never never know when interest rates hit bottom, until they’ve gone up! Then it is too late! A change of just .05% in the mortgage interest rate increases the monthly mortgage payment by $82.88, or $994.56 per year  on a mortgage of $275,000. That slight increase in the mortgage rate reduces the amount of the mortgage to be borrowed by approximately $15,000 in order to keep the same payment as the lower interest rate. More simply put, if a buyer did not want a higher mortgage payment, their price range or mortgage amount would need to drop by $15,000 or they would need to add an additional $15,000 to the down payment.
                                                                              
View: Favorable Home Prices: So what has happened to real estate values in the same period?