As you are aware, some of what we try to do in marketing properties is educate potential buyers. The following information is especially relevant as we try to communicate that NOW continues to be, in our opinion, an extremely good time to get into this market. Many people seem to still be on the sidelines waiting for prices to drop further. The below analysis shows that once interest rates go up, which most all economists see coming, the monthly COST of a property will go up, even if the PRICE stays the same. Higher interest rates also will mean that Buying Power, reflected in what a Buyer can afford in a monthly payment, will deflate the purchase price that that Buyer can afford.
Cost versus Price
On big ticket items like homes, it is not about price. It is about cost.
Price/Cost Example: If the price of a property is $300,000, the down payment is $60,000 and the loan amount is $240,000, here is what happens to the Monthly Cost depending on the interest rate:
If the rate is 4.17% then the monthly payment is $1,169.44
If the rate is 4.77% then the monthly payment is $1,254.84
If the rate is 5.50% then the monthly payment is $1,362.69
Price Increase = 0
Cost Increase = +16.5%
Buying Power Example: If the amount of the monthly payment a Buyer can afford is $1,169.44, then the loan/buying power looks like this depending on the interest rate:
If the interest rate is 4.17% then the buyer can afford a $240,000 loan
If the interest rate is 4.77% then the buyer can afford a $223,666 loan
If the interest rate is 5.50% then the buyer can afford a $205,964 loan
Cost of waiting 11/15/2010 – 12/31/2010 = $16,335
Projected cost of waiting 11/15/2010 – 6/30/2011 = $34,036
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