Real Estate Market for Buyers: Questions and Answers Part 1

Interest Rates - 50yr Low

I frequently get asked random questions about the real estate market in the Seattle Area, so I thought I’d start a  Q & A series to address the real estate market for buyers.

Q:   Why should I buy now if prices haven’t yet hit the bottom of the market?

A:  As a real estate buyer, your primary concern should be the full cost of purchasing a home, not just the purchase price.  What will your over-all monthly payment be?  To answer that, you need to know what goes into a monthly payment:

1.  Principle – the amount of your monthly payment that goes towards the repayment of the original loan (mortgage) amount.

2. Interest – this is the biggie! (More important info on this below.)  This is the amount the lender is charging a buyer for borrowing money to purchase a home.

3. Taxes – annual amount of real estate taxes charged for the home (broken into 12 monthly payments), based on the property tax rate for the city & county and the tax assessed value of the home.

4. Insurance – the annual homeowner’s insurance policy based on 12 monthly payments.

So now that you know the 4 components that make up a monthly mortgage payment (PITI for short), let’s analyze the components that have the most volatility.  Taxes and insurance are the most steady elements of the house-payment.  So here’s the key part!   Let’s look at this example with changing purchase price vs changing interest rates:

Purchase Price of $550,000  @ 4.5% interest is a monthly house payment (PI) of $2786.77

Purchase price of $550,000 @ 3.5% interest is a monthly house payment (PI) of $2468.75

Purchase price of $525,000 @ 4.5% interest is a monthly house payment (PI) of $2660.98

The main point here is that a 1% interest rate drop far exceeds the savings of a $25K price drop.  In fact, at this price point, it will take at least a 10% (+) price reduction to equate to a 1% interest rate drop…so if it’s your time to buy, get the best price on the home that you can, and align your home purchase with your life, not the market.   Have we ever seen interest rates this low…not in my lifetime!  Or look at it another way:  interest rates won’t be this low forever, so with each potential uptick of interest rates, your purchasing power drops, sometimes in chunks of $50K or more.  Maybe we’re focusing on the wrong thing when buying real estate; housing prices are already at 2007 lows but interest rates are at 50 year lows…your thoughts?

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