I wanted to share something with you in the event that you may still be on the fence about buying a home in Madison (or anywhere in Dane County). As we've seen over the past two weeks, the historically low rates that we've been witnessing are not going to last forever and, in fact, have already started rising. And while it is true that Madison house prices may continue to soften (although it must be pointed out that, overall, they have held up quite well), from a buying perspective there may never be a better time to buy a house in Madison and here's why:
But before I launch into an explanation of why now is such a good time to buy, please know that I am not trying to “talk you into” buying a home in Madison; on the contrary I'm assuming you're already planning to do that but that you just haven’t decided when is the right time to buy or that you're looking for some kind of signal or "sign". Kind of like the Toyota commercial. Well, here's your sign...
We subscribe to a service provided by a guy named Steve Harney. You can Google him if you want, but he is a respected industry analyst and in his November 2010 update he sent some information about “when is the best time to buy”. I can’t send you the audio, but I’ve got a few of his slides that you might find interesting (the mortgage rates slide above is one of them).
Again, no one is going to tell you there's absolutely no chance that Madison home prices might not soften a little further, however while price is obviously very important ultimately it is the cost of ownership that drives purchasing decisions. The “cost” is, after all, what that home (or car, or TV, or what have you) is going to cost you to own, i.e. what the payments are going to wind up being, not necessarily what you paid for it. Let me just show you a few numbers for you to consider:
Example 1: $200K home at 4.5%
Let's say you're considering buying a home in Madison that's selling for $200K right now. For the sake of simplicity, let's say you would be financing 100% of that purchase price at 4.5% for 30 years. So that works out to $1,012.76/month. If you take that monthly cost and multiply it times 360 payments you get a total cost of $364,593.60.
Example 2: $180K home at 5.5%:
Now, for the sake of argument, let's say that same Madison home sells next summer for $20K less or $180,000 (a 10% reduction, even though no one is predicting a 10% drop in prices). Again we'll use 100% financing but this time let's say there is a 1% increase in the rate to 5.5% for a 30 year mortgage. That means the monthly payment winds up being $1,021.52/month! In other words, take that monthly payment times 360 payments and you get $367,747.20, a figure that is actually $3,153.60 HIGHER than the previous example even though you paid $20K LESS for the home! Obviously the more expensive home with the lower rate gets you the home at a cheaper monthly and total cost.
Again, no one really knows what's going to happen and there are no sure bets, only educated ones, however the experts in the mortgage industry and real estate industry both agree that rates WILL go up at some point. Case in point: the National Association of Realtors (NAR) and the National Association of Mortgage Bankers (NAMB) both predict rates will go up (see above chart). The big question is when? Some are predicting rates will rise after two more consecutive months of improving unemployment figures but who really knows? Only one thing is for sure: If mortgage rates go up even 1% before you buy your Madison home, and even if the price you pay drops by a full 10%, that home will still cost you more per month to live in than if you bought now with current mortgage rates.
Again, please don’t take this as me trying to talk you into buying a house in Madison. I'm merely presenting you with information you should consider as opposed to trying to "time the market". The bottom line is that anyone in the market for a home in Madison who's been waiting for prices to hit bottom could very well wind up costing themselves their hard-earned money. Remember, as with anything, there are no sure bets - only educated ones - but based on all the information currently available, the smart bet is that interest rates are headed up.
What are your thoughts on this topic? Does this change your mind about when you plan to buy? Scroll down and weigh in with your comments.