- Peter KingDecember 10, 2011 - MortgageLoan.com
Friday, Dec 9, 2011
Thinking about buying a home but afraid the housing market’s still too weak? Or maybe you’re afraid that interest rates will jump if you don’t act now? What’s the bigger risk?
It’s a tough question and one that a lot of potential home buyers are mulling over right now. And, like many questions about real estate and personal finance, there are no easy answers.
Can either fall any further?
One thing that’s clear is that home prices have been sliding. Nationally, they’re down a bit less than 4 percent over the past year, according to several leading surveys. While that’s nothing like the steep declines that occurred when the housing market crashed a few years ago, it’s still clearly a weak market.
Mortgage interest rates have been sliding as well. After gradually declining through most of the year, 30-year loan rates finally bottomed out at record lows last October and have been bouncing along the bottom ever since.
Looking ahead, most analysts expect home prices to remain flat through 2012, although the data firm CoreLogic takes a more pessimistic view than most, predicting another 3-5 percent decline before a rebound begins.
At the same time, others see signs of a potential rebound amid improving employment numbers and the fact that prices in conventional home sales have essentially held steady over the past year – nearly all the decline has been in distressed sales (foreclosures and short sales). But no one expects prices to jump anytime soon.
How long can interest rates stay low?
The picture with mortgage rates is a bit more volatile. Last winter, when 30-year rates were bumping around at or just below 5 percent, few thought it likely they could fall much further. Instead, like the air hissing out of a balloon, they gradually shrank all spring and summer, finally bottoming out around 4 percent, according to Freddie Mac
figures, where they currently remain.
There’s a general sense that mortgage rates just can’t stay that low much longer – that sooner or later, they have to head up again, if not to the 5 percent level that seemed like a bargain not that long ago, at least to a still-attractive 4.5 percent (although Freddie Mac sibling Fannie Mae
forecasts 30-year rates will remain in the low 4 percent range through the coming year).
Costs of falling prices vs. rising rates
One way of comparing the risk that price will keep falling versus the chance that interest rates will rise is to compare the relative costs. Generally speaking, an increase in 30-year mortgage rates from 4.00 to 4.25 percent will boost your monthly payments about 3 percent, while an increase to 4.5 percent will increase it about 6 percent. So a 6 percent drop in home prices coupled with an increase in mortgage rates to 4.5 percent would be pretty much a wash – your monthly payments would be about the same.
It’s important to keep in mind too that home price changes vary greatly around the country – prices may rebound sharply in areas with few foreclosures, while continuing to sag in distressed areas with a significant oversupply of empty homes. But changes in interest rates tend to affect the country as a whole.