A question I'm frequently asked from home buyers considering buying a Marin County home is, "Will this home be worth less a year from now?"
Determining home value in the present day is tricky, let alone a year from now. There are so many factors to take into consideration. For example, what is someone willing to pay for a home? What will the jobs market be like a year from now? Most importantly and least discused is what will the interest rates be a year from now?
Huh? Did somebody say interest rates? (Drum roll please). Now I'm not an economist, or a fortune teller or a predictor of the future! But I'm going to take a guess that interest rates are bound to go up. The question is when and by how much? They've been going up since last October 2010. At the moment interest rates hover around 5%. A historically low rate. Last year they hovered around 4.5%, a historically lower rate. What's my point? My point is it cost more to mortgage a house with a higher interest rate.
Using an online mortgage calculator I've entered the simple calculation of a $500,000 mortgage at 5%, 6% and 7%. Thus, if today you get a loan of $500,000 at 5% your monthly mortgage is $2684.11. Bump up the interest rate to 6% and your mortgage is $2997.75, a difference of $313.64 - a car payment. Bump it up to 7% and your mortgage is $3326.51, a difference of $328.76 from the 6% rate and a difference of $642.20 from the 5% rate. $642.20 per month is a lot of money!
To clarify, if you're sitting on the fence and waiting for home prices to drop more, you'll likely price yourself out of the market. At this point in time, predictability (home prices falling year over year) is not a reliable factor for determining whether or not you should buy a home. The factor to determine if now is a good time for you to buy a home is can you afford a mortgage today.
And by the way, the best way to determine that is to talk to a mortgage broker or a direct lender (the topic of my next blog - talk to a mortgage broker or direct lender before shoping for a home).