30 Mar The Upside of a Down Market
As good news begins to trickle in from varying economic and housing reports, the country seems poised for a legitimate housing market recovery. Many highly-respected financial experts agree that the movement in the real estate market is improving; however, the only clear perspective on housing trends is one that both looks to the future, while still considering the past. I believe that many of us will reflect upon this time in the future and say, “I knew that was the time to buy real estate!” But how many of us will actually take advantage of this unprecedented opportunity?
The purchasing power of low interest rates and a depressed housing market
The record low interest rates, paired with the reduced home prices have created the opportunity to purchase more home for the same monthly payment. In the case study below we will compare buying a home back in 2007 with buying a home today.
The impact of reduced interest rates:
- $154,488 borrowed at 6% = $926.23 / month (P&I only)
- $200,000 borrowed at 3.75% = $926.23 / month (P&I only)
Therefore, the same $923.23 monthly payment will afford you an additional $45,512 in buying power at a rate of 3.75% vs. 6%.
The impact of lower home values:
Since 2007, home prices have dropped an average of 30%. This means that a home that once cost $357,000 back in 2007 would now sell for approximately $250,000. That’s $107,000 increased buying power at current home price levels.
When combining the benefits of lower interest rates and home values in the above example, the increased buying power is $152,512 since 2007. For those who bought back then, this might seem a depressing figure. However, for those buying today this represents a historic opportunity to build long-term net worth and stability.
The future for our children in the real estate market – The opportunity is now
Many parents are worried, with the current instability in the market, what the future opportunities will be for their kids to own real estate. As values and interest rates move higher, the opportunities will decrease. Also, with the cost of rent continuing to rise, the upward pressure on home prices will continue to push higher, and the long term burden of a rent payment will continue to grow. To combat this, many parents are purchasing homes at current price levels and using the home(s) as a rental property until their children are able to take over the home and mortgage payment. By doing this, they are ensuring an affordable home and monthly payment with today’s rates and securing the dream of home ownership for their children and grandchildren in the future.
If you have questions about the current housing market or interest rate environment, I’m happy to help in any way I can.