If You're Not Buying Real Estate Now, You're Either Stupid or Broke

I'm taking this entry a little outside the bounds of my blog's title, but it still somewhat applies.  And, if the title offends, stop reading now.  But, it isn't my title- it's actually a slight variation of the title of an article in Business Week.  It's attention grabbing, but it pretty much sums up what those of us in real estate-related industries are talking about amongst ourselves.  So, there you go- the secret is out.  It's because of things like interest rates and prices of property being down.  I mean did you see where the Silverdome in Detroit sold for $583,000? The city spent $55.7 Million to build it- pretty sweet deal for some sneaky Canadian investors...

My situation is the latter part of the title because of real estate investments that I've already made personally.  But, the "stupid" part applies to a lot of folks who are waiting on the grass to get a little greener.  The truth is the grass can't possibly get any greener! Interest rates are at an ALL-TIME low right now- this week they're at 4.31% for a 30 year fixed loan and a minimal qualifying credit score.  This is by far more important than any tax credits (like the $8000) that are available to first-time homebuyers and the $6500 available to exisiting homeowners.  Don't get me wrong, I wouldn't give my tax credit back, but the interest rates are much more of a big deal.

Here's why.  By the end of 2010 or in early 2011, interst rates will be upwards of 7 or 8%- and maybe higher.  The Fed will have to do that to try and stabilize the economy and inflation rate.  And, right now, in most areas of the Mountain South, a buyer with a saavy Realtor (preferably from T. C. Lewis & Co.) can negotiate a house normally priced at upwards of $300,000 down to around $250,000 (in a lot of cases).  So, a monthly mortgage payment with a 5% downpayment at 4.31% on an above average home in the Mountain South- let's say $250,000- is going to be roughly $1171.00 per month.  When interest rates get to 8%, that payment is going to jump to around $1743.00 per month.  That's a huge amount- nearly $600 per month!  That's more than the total monthly rent that my buddies and I paid in college!

Now, here's the other side.  We also have those "smart buyers" out there right now that are thinking that prices may continue to drop for a few more months into 2010, so they'll just wait to purchase.  I use the term "smart buyer" loosely because the prices may indeed drop, but it's all in the math.  Check this out.  If a "smart buyer" waits to purchase a home for a few thousand dollars less sometime near the end of 2010 and has to take an 8% interest rate, he or she is actually losing money.  Let's use the same house example as before.  Let's say the house that we could negotiate to $250,000 now is still on the market in late 2010.  At that point, it may be that we could negotiate it down to $230,000.  But, a $230,000 mortgage with that same 5% down and an 8% interest rate will cost around $1604.00 per month.  That's still $433 above the mortage payment for that house at a higher price but lower interest rate now!  Let's run that purchase price all the way down to $200,000 at the end of 2010.  With the 5% down and 8% interest, that mortgage payment is still $1395.00.  That's still more than $220 over the first scenario!

So, the whole key to this is thing is the math.  Buy a $300,000 home today at a fairly discounted price of around $250,000 and get a mortgage at 4.31%.  Or, you can wait a year, hope it's still on the market, and try to possibly get the place for another $50,000 less (at $200,000) and actually end up paying more for it.  Consumers have to stop looking at the "sticker price" and start weighing everything that goes into the purchase.

And, don't even get me started on the "smart buyer" who buys for that $200,000 price and then decides to sell a year later for $350,000 after setting a terrible comp for themselves in the neighborhood... their own house!  I guess it will be the appraiser's fault at that point, right?

So, the moral of this post is to avoid being a "smart buyer."  Find somebody who knows how to help advise you, and then listen to them.  Please don't prove the "stupid" part of this title right...