Interest rates today are extremely low, at a fifty year low to be exact. So does it make sense to purchase a San Diego home today or wait for prices to drop even further? John Paulson, a multi-millionaire hedge fund manager says in a recent Forbes blog post, "If you don’t own a home, buy one, if you own one home, buy another one, and if you own two homes, buy a third and lend your relatives the money to buy a home."
The numbers don't lie, if prices were to drop 10 percent that is almost equal to a 1 percent increase in interest rates. In the San Diego real estate market, this could significantly impact your purchasing power and could also be the difference between being able to purchase a 4 bedroom home vs. a 3 bedroom home. Let's have a look at an example purchase price of $500,000 and how the effect of rising prices vs. rising interest rates will affect your mortgage payments. You can also run your own test by using the free mortgage calculator.
|Today||Rates up 1%||Prices Drop 10%|| Rates Up 1%
Prices Drop 10%
|Principle & Interest||$1967.76||$2208.81||$1770.98||$1987.93|
|Financing Type||30 year fixed||30 year fixed||30 year fixed||30 year fixed|
While no one has a crystal ball to determine what will happen in the future San Diego real estate market. To find out what would be a more likely scenario, a study was done by Keller Williams Realty research department by looking at trends of monthly home prices and mortgage interest rates over the last 10 years. Here were their results:
- A one percent increase in mortgage rates is ten times more likely to happen than a ten percent drop in home prices.
- A one percent rate increase more than offsets a ten percent reduction in home prices.
- When interest rates fall by one percent, the total interest paid is almost three times more than the interest savings from a ten percent drop in home prices.
- The probability of both happening at the same time is ridiculously small, and homeowners would still pay 15 percent more in interest over the life of the loan.
There is no doubt that real estate in the United States has always been a great investment. As seen above, interest rates have such a huge financial impact on monthly mortgage payments and those who wait could potentially be missing out on one of the best opportunities to purchase a first home, move up, downsize or invest in real estate.
What does this all this mean and how does this benefit you if you're selling your home? Granted, San Diego home values are down from the height of the market several years ago and there are still a lot of short sales and foreclosures in the market. You may have to take a loss if you sell your home now, here is the good news, most times this is offset by the savings you get when you purchase your next home, not to mention the new low interest rate you'll be taking advantage of. What are your options...wait? That's certainly valid and if the price of your home goes up, it's likely that the new home you purchase will also go up in value as well. So you can see that waiting doesn't really help. The other benefit is that since interest rates are so low, there are a lot of serious buyers out there looking to purchase a home and don't want to wait for the short sale process or deal with a bank owned home.