Higher Interest Rates Negate Price Drops

….in other words, even if prices are going down, interest rates are likely go up later this year and undermine any price drops.

How does that work? (Thanks for asking.) Here’s how.

Prices are going down for now, but interest rates are going up.

This is totally different from last year when prices were still dropping AND interest rates were also dropping.

If you look at this chart you can see that prices were climbing last year, but they are dropping thus far this month. Let’s hope it stays that way before people start scrambling for the $8,000 tax credit! However, don’t expect it to. Prices went up last fall when people were buying in time for the tax credit.

Look very closely for the emerald green 2010 line at the lower left. It is almost hidden because it is laying right on top of the orange 2009 line.

While it looks like prices are going down, just know that prices usually go down the first couple months of the year until folks start really gearing up their searches.

Further, interest rates are expected to go up by March and interest rates make a huge difference in your monthly payments.

For instance, if you buy a $100,000 house at 5.5% interest, your monthly payment (before taxes and insurance) would be $568. The same house at 6% interest would cost $600 per month.

That extra $32 per month is $384 per year or $11,520 over the life of the loan!

Another way to look at it is that in order to have the same payment every month that you had at 5.5% interest, you could only afford a house that costs $95,000 at 6% interest.

So, what does this mean? It means that you want to consider getting in to the market before interest rates go up.

It also means that you probably want to act before both prices and interest rates go up. That is the worst case scenario!

Give me a call. I’m more than happy to help you navigate the market: 602-456-9388.