The Cost of Waiting for Prices to Fall

by The KCM Crew on February 11, 2011 · 95 comments

Many purchasers have been sitting on the sidelines waiting for home prices to hit bottom. They want to guarantee that they are purchasing at the best possible price. Like them, we also believe that prices still have some room to fall in most markets. However, we disagree that waiting is a good financial decision. The buyer should not be concerned about housing prices. They should be concerned about cost.

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 4^th 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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About The Author

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mike

The cost of waiting is now being exposed as interest rates have dropped again and housing prices have continued to go down. One should always be alert to absolute statements. The truth is we never know for sure what the future brings. Generally when someone is making an absolute statement it is based on their own agenda rather than a balanced view of the possible tradeoffs for you the consumer.
http://www.steveharney.com Steve Harney

@Mike,
Great points. However, if we do the math, it would still have been less expensive to have bought in November than down. Granted not much less expensive – but less expensive. And that is with prices falling 4.45% since then (according to Caser Shiller Index). The rate has softened in the last several weeks but it was 4.17 in November. And that is not taking into consideration that other mortgage costs have increased dramatically (FHA for instance) or are about to (QRM & Conforming Loan Limits). The original post was about educating the public to the fact that there are other factors that impact a home’s cost besides price.
As far as my agenda, it is quite simple: to help educate the public about their purchase of a home. I commit hours EVERY day on research and putting together a quality post for that reason. Do I lean heavily toward the belief that homeownership is better for most than renting? Yes, I do. I don’t hide that fact.
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Josh G

Steve, I stumbled on your blog and was not surprised by your position and those of your colleagues. Real estate agents serve one purpose, and that is to promote the sentiment and encourage home owner/sellers that no time is better than now to buy/sell their home. This makes sense since your industry generates exorbitant sums of money on real estate transaction fees. This is no better illustrated the by the NAR’s position as “housing cheer leader” leading up to the last minute before the real estate bubble popped. Agents are, as a group hurting now, and now you are trying to crank start the engine again.

Your illustrations above have no place in reality. If you say that you should buy a home now because rates are low and the same house will cost you more when rates increase, then you are ignoring some basic principles of microeconomics. As the cost of money increases (ie. rates go up) there will be a proportionate downward pressure on home prices. Such that the affordability of the home will remain the same. The best time to purchase a home is when interest rates are high. The purchase price of the home will be historically low and the monthly cost for the same house with remain the same. However, the homeowner in this situation will have an easier time to paying off their home. Additionally they will benefit from future reduction in interest rates which will increase equity in their home should they choose to sell.

Low interest rates fueled the housing bubble and tremendous housing inflation of the past decade. High interest rates will have an equal and opposite downward pressure on home prices resulting in housing deflation which is always good for the buyer.

Many of you need to stop drinking the cool-aide since consumers have woken up to the scam.
- http://www.steveharney.com Steve Harney
  
  @Josh
  Appreciate your thoughts on the subject. Couple of points:
  1.) There are eight members of the KCM Crew. Only one has ever even held a real estate license. That one is me and I haven’t practiced real estate in over 10 years.
  2.) Real estate prices skyrocketed in 2004-2006 well before interest rates fell to current levels.
  3.) Interest rates alone have never determined prices. If that was the case, homes would be selling at historic highs right now. It is true that an interest rate increase could affect the number of buyers who qualify and that could impact demand. Demand is a component in the equation that helps determine price.
  4.) How do you think the expiration of the current Conforming Loan Limits and the QRM proposal will impact a buyer’s mortgage costs? We believe they will dramatically affect the cost of a home.
Josh G

Responses to your points:
1. Appreciate the clarification. I was referring more to some of your blog followers who are obviously real estate agents.
2. Interest rates in 2004-2006 at the height of the bubble was already a near historic lows. Prices skyrocketed until the financial crisis. Fed reduced rates further in hopes to reinflate the economy. This is hard to do with general uneasiness felt though the country, double digit unemployment, lack of easy credit, etc. In other words, the economy as a whole was in shock, and the real estate bubble was the spark.
3. I agree with you on this point. Interest rates alone do not determine prices. But supply and demand does. However, interest rates have a significant effect on demand tied in to affordability. Housing prices will adjust lower to become more affordable. A house, as with anything, is worth what someone is willing to pay for it. Your premise, “if low interest rates increase demand, current house prices should be at historic highs”, is too simplistic. Leading up the the housing crash, speculation had led to an over supply of homes in many markets(inc. supply), double digit unemployment(dec. demand), tight lending standards (dec. demand), foreclosures entering market (inc. supply), and others.
4. You say it will dramatically affect the cost of a home. I say it will dramatically affect the price of a home.
- http://www.steveharney.com Steve Harney
  
  @Josh G
  1.) No problem. Many think we are real estate practicioners.
  2.) Good points.
  3.) My comment about interest rates and prices was intended to be simplistic-and obviously not correct. That was in answer to your point that “As the cost of money increases (ie. rates go up) there will be a proportionate downward pressure on home prices.” To me, that was overly simplistic.
  4.) Again, I don’t believe you are seeing our point. Over the next eighteen months, two things will happen:
  a.) supply will decrease as we work through the inventory of distressed properties-the number one pressure on prices
  b.) the cost of financing will increase as the government backs away from their assistance to the housing industry.
  
  These are the reasons that the KCM Blog, the Wall Street Journal and Fortune Magazine are all saying the same thing: Now is the time to buy.
Josh G

Steve,
You are way too optimistic. The sluggish growth of the economy, high unemployment, stagnant wages, tight credit and lending standards, etc will not result in a rebound in real estate prices any time soon. I argue collectively these are overwhelming negative forces too great to expect a net positive effect on home prices from low interest rates alone. Additionally not to mention the “shadow inventory” of homes foreclosed but not yet listed and those in the foreclosure process. BofA alone has an estimated 750,000 homes in this category nationwide. Add on the other major banks and you have an enormous amount of distressed inventory that will last quite a while. Foreclosures are arriving on the market at a trickle rate yet still account for a large percentage of current home sales in many regions. Home prices at some point in the future will rise, but not anytime soon. And it is not foolish in my view to rent and sit things out until the economy rebounds since home prices have not seen their bottom yet.

I follow your logic. But your logic is flawed since you neglect to consider the state of our economy. Saying “its a great time to buy” with such conviction is fool-hearty. You don’t have to bear the consequences should your advice prove wrong to those who take you at your word.

I’ve enjoyed this verbal joust. Good day.
- http://www.steveharney.com Steve Harney
  
  @Josh,
  I also have enjoyed our conversation. You make excellent points and obviously have done your research. No one has a crystral ball. But, I truly believe that now is really a great time to buy. Some agree with me; others agree with you. Time will tell.
  
  As far as others bearing the consequence of my advice, I am quite aware of this. My son just closed on his first home – based on my advice.
  
  Goodnight.
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http://damned.za.pl/profile.php?mode=viewprofile&u=18278 Marya Kinnan

Hello there! This is my 1st comment here so I just wanted to give a quick shout out and tell you I genuinely enjoy reading through your posts. Can you suggest any other blogs/websites/forums that go over the same subjects? Thanks!
- http://www.steveharney.com Steve Harney
  
  Hi Mayra,
  Thanks for the kind words. In the right hand column of the blog, is a ‘blogroll’ which are other blogs we recommend. You can start there. Check out their blogrolls also.
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mike

Ran in to another realtor today who immediately went to the “low interest rate” card. While I respect that Steve has a more educated and balanced view of the financial variables than most real estate “professionals” it is amazing that this very large financial transaction is looked at so simplistically (my commission) by the vast majority of folks in the industry. Price does matter and we need to be smarter consumers and rely on better advice than the typical realtor or mortgage broker offers.

If we lived in our houses for 30 years it would be one thing, but the research clearly shows that most of us don’t. If real estate always went up without drops then I might agree that rate trumps price. Intellectual laziness is still laziness and will put the consumer in a bad position. If you are in an area where it is unlikely that prices will rise sharply in the near future (most of the US) then you may well fare very well by waiting. If a 1% interest rate increase makes a house unaffordable to you then I would tell you that you shouldn’t be stretching that far at today’s interest rate.
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Mike

A bit of context for the “historical” evidence that an increase in rates won’t push prices down. The two most recent time periods that are referenced happened to coincide with government measures that artificially created demand. Much of the fuel for real estate appreciation in the last 30 years has been provided by governmental agencies assuming the risk, thus creating more buyers who had worse credit and put less money down.With the government now vowing (take that with a grain of salt) to back away from the mortgage business we are much more likely to see an increase in borrowing costs drive prices further down.
Mike

Steve, looks like the 30 yr fixed rate was 5.05 when this article was published. Using hindsight you compared that to the absolute low point in November. How about an update with a comparison from when the article was written to what we’ve seen in recent weeks. The door should swing both ways if offering balanced advice.

I’ve seen this article referenced by multiple mortgage and real estate sites. You are enough of an industry veteran to know that it will be used in this fashion. An update that they won’t post on their website would distinguish you from the industry folks.
- http://www.steveharney.com Steve Harney
  
  @Mike – I was thinking of taking you up on doing a new blog but, after doing the numbers, little has actually changed when you look at the bottom line.
  
  Back in November, the median sales price was $170,000 and the Freddie Mac 30 year interest rate was at 4.17%. As we noted in the blog, the mortgage payment would have been $828.36.
  
  Today, the median price is $184,000 (yes, prices have ticked up) and the Freddie Mac rate is 4.23%. The mortgage payment would be
  $903.02, almost $75 MORE per month.
  
  A buyer would have waited 10 months only to pay MORE! That was the point of the blog: waiting may not guarantee you a lesser cost.
Mike

Steve,

Fair enough although you are once again measuring from November 2010 rather than February when you published the article. Easy enough to cherry pick the data in hindsight. Anyone who read your article and was convinced it was time to buy did not have the luxury of a time machine so that they could go back to November.

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.

The national median existing single-family home price was $171,900 in the second quarter, down 2.8 percent from $176,800 in the second quarter of 2010.

Interest rates at the time you published the article were around 5% and now are around 4.5%. At best I think a reasonable analysis would lead to the conclusion that it has not cost much, if anything, to wait.
- http://www.steveharney.com Steve Harney
  
  @Mike,
  That’s my point! People are delaying good family decisions hoping they will save money. They are not saving. They are just putting off their dreams and goals. I am not cherry picking dates. Friday, I will do an InfoGraphic showing the costs for each month for the last 12 months. I have not yet done the research, but I promise to print it no matter what it shows.
Mike

Steve,

Think we are at a stalemate. The title of the article was “The cost of waiting for prices to fall”. Perhaps it should be titled, “The possible cost of waiting for prices to Fall”. The industry (not you per se) has always been a cheerleader for “now is the time to buy”. Even found an article of the same title from 2007.

It is reasonable to say that much of the demand that pushed housing prices up over the years came on the heels of government backing of mortgage risk. It remains to be seen what they do this time. Good for you for having this blog and engaging in this discussion. It has provided a balanced viewpoint of the possible tradeoffs in buying vs. waiting.
- http://www.steveharney.com Steve Harney
  
  Thanks for your support, Mike!
  
  On Friday, I am going to show the P&I for the median priced home each month for the last year in an InfoGraphic. This way we can all see the wisdom of waiting or not waiting.
  - Mike
    
    Well….who would have believed we’d be into 2012 and well under 4% on a 30 year mortgage. Now would be a good time to revisit this article. The biggest surprise is that prices have dropped, but not as much as many forecast. Economic recovery seems to be happening and that will create some demand.
    - http://www.steveharney.com Steve Harney
      
      Great point, Mike. I did the comparison. If someone waited and bought this February instead of last February they would have saved over $140/month on their mortgage payment (assuming they could still get a mortgage under the stricker lending requirements). This is more than their increase in rent payment. From a pure financial analysis, waiting would have made sense.
Realtors Are Liars®

So now is the time to buy considering prices are falling and in fact the declines are accelerating?

You guys need to get honest for once in your life.
- http://www.steveharney.com Steve Harney
  
  @Realtors Are Liars
  
  The blog you commented on is over six months old. It was 100% accurate for those who waited until then (as the math showed). A more current post you may want to comment on is http://kcmblog.com/2011/08/19/homeownership-why-wait/
  It shows what has happened over the last year.
  
  P.S. Though we agree prices will soften this winter, prices in the last quarter have actually increased.
http://www.youku.com/ kuku666

Thanks for this post, I am a big fan of this web site would like to keep updated.
http://www.mswoods.com/ Mike from Indianapolis

Absolutely right. The only way to know the market has hit bottom is after the fact, when there is a sustained trend towards higher prices. By this time, of course, the buyer has missed out on the opportunity to buy a rock bottom. Plus, like you said, there is a real danger of mortgage rates rising. On this point alone, there is a case to be made for simply buying on the basis of rate, rather than price. In the end, it is the COST that determine the merits of buying.
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Suntasticday1

If prices fall with higher interest rates, then it would be better to wait. If you’re waiting and saving(if you’re going to buy a home, you need to be disciplined to save anyways), you’ll have a bigger down payment with a lower cost home. Also, with lower cost home, it’ll be easier to pay off your mortgage earlier as well. Plus, with rising interest rates, the cash that you have on the sideline should get you better interest in the savings account or CD.
However, interest rates will only rise with economy picking up so it may be several more years before that happens.
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