- The Washington Times - Wednesday, March 10, 2004

In a market where prices are continuing to move up, should a potential buyer ever wait for home prices to drop before diving in?

First, check your local economic outlook. Home prices are driven by supply and demand — straight and simple.

One of the myths about real estate is that interest rates drive sales and prices. History shows us differently. During the 1990s, the average mortgage interest rate was at 8.11 percent. Only in 1998 did the average interest rate for the year fall below 7 percent.

Since the beginning of this decade, average rates have lingered in the 5 to 7 percent range, despite some months of recession, with mortgages on fixed rates as low as 5 percent.

During both periods, overall economic growth drove sales. Once the economy heated up, interest rates edged up.

Waiting for prices to drop may not save you as much money as you think. In fact, a lower-priced house could cost more than a higher-priced home by virtue of the interest rate.

Here’s an example: A $300,000 mortgage financed at 5.75 percent on a 30-year note would result in a monthly payment of about $1,751. Take a $275,000 mortgage with the same terms, but change the interest rate to 7.5 percent, and your monthly payment jumps to $1,922.

So, do you really want to wait for the market to drop and possibly get a higher interest rate, too?

When considering that move up, look at the monthly payment in today’s home-buying environment. Buyers really don’t qualify for a home price these days; instead, they are qualifying for the monthly payment.

If you must sell your house first before moving up, remember that the prices of both homes — your current home and your prospective move-up home — are priced higher. So a homeowner who waits until his targeted house price drops is also seeing a depressed price on his own house.

Let’s say you want to buy a larger home that’s priced at $350,000 — too much, you fear. Meanwhile, your house is worth $275,000, and you have $125,000 equity in the house, with a mortgage balance of $150,000.

If you wait, hoping the market will drop the house 10 percent to $315,000 — it’s likely that your current home has headed the same direction. Now, your $275,000 property is only worth $247,500. Your equity has deteriorated by $27,500. By waiting, you’ve lost the extra cash for a larger down payment. Plus, now you’re not in the driver’s seat as the seller — if home prices are dropping, it’s a buyer’s market.

The numbers speak for themselves.

Assumptions here are the cost of sale equaling points, closing costs and selling commission. The payments are for principal and interest only.

• Appreciated market samples

Current home sales price: $275,000

Cost of sale: 10 percent ($27,500)

Equity for down payment: $97,500

Mortgage on new home: $252,500

Payment on 6 percent mortgage: $1,513

Payment on 7 percent mortgage: $1,679

• Depreciated market samples

Current Home Sales Price: $247,500

Cost of sale: (10 percent): ($24,750)

Equity for down payment: $72,750

Mortgage on New Home: $242,250

Payment on 6 percent mortgage: $1,452

Payment on 7 percent mortgage:# $1,611

As you can see, waiting for the price to drop $35,000 is going to save you roughly $60 per month.

Now here’s the final question in this scenario: Which home do you want to be in when the annual appreciation of 5 percent kicks in again, your $247,500 home or your new $315,000 home? Hint: Your current home’s cash appreciation will now be $12,375 per year, while the more expensive home would increase at $15,750 per year.

If you’re looking for the long-term investment — more than 10 or 15 years — then don’t wait. Throughout the years, real estate has proven to be a safe investment.

M. Anthony Carr has written about real estate for more than 15 years. Reach him by e-mail ([email protected]).

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