Interest rates vs. sales prices: market forces, part 2
Sam Schneiderman, Broker-owner of Greater Boston Home Team continues his Monday series.
Last Monday, we began a discussion about market forces to consider when buying.
I asked two questions:
1. Based on a good look at the indicators, do you think that timing the market is really possible?
2. Should buyers and sellers try to time the market or just move when they are ready?
Overall, those that answered the questions were balanced between those that thought the market could be timed and those that thought it could not. If our small survey is correct, then Lai was correct when she said:
“I find people who said the market will bottom in next 12 months and people who said the market will crash 20% in next 12 months equally overconfident about their opinion. We just don't have that crystal ball.”
There were also those that were buying or in the market because they were ready or needed to at this stage of their lives and they could get a mortgage they could afford. I agree with John, who said,
“There is really only one factor that drives home prices and that is the ability of a person or household to service the mortgage debt (and all other related household expenses). The ability to service the debt in turn, is tied to wages, interest rates and credit availability.”
What surprised me is that there was not much talk about prices vs. interest rates.
Years ago one of my appraisal teachers commented that he was selling his investment real estate while we were at what looked like the top of the market. When I asked why, he said that real estate is driven primarily by affordability. When housing affordability becomes challenging for most Americans, the market levels or falls. (Sound familiar?) The market rebounds after an adjustment period during which wages and employment creep up again and credit becomes more available as a result.
It seems that the behavior of the population that makes up the American real estate market has taught us that an affordable payment and stable employment are the deciding factors between the decision to buy or not to buy for enough buyers to influence the market. (That is actually happening now as low priced foreclosures and historically low interest rates make housing available to those previously locked out of the market….if they can qualify for a mortgage.)
There is talk that interest rates should begin to creep up soon. As a result, maybe housing prices will roll back further in some areas, maybe they won’t. Consider that if interest rates increase by about one percent, the cost of a home has to roll back about ten percent for the payment to remain the same. Assuming that people buy when they are ready or need to and plan to stay in a home for the long term, here is today’s question:
If someone is planning to buy in the next year, does it make more sense to buy now at today’s prices and low interest rates or wait to see if prices roll back and risk paying a higher interest rate? (There are two obvious answers and one that may not be so obvious.)
What do you think?
