“We have seen the enemy and it is us.”
Not too long ago, the media was proclaiming that home sales were sizzling. Folks read the paper and joined the buying frenzy. Last fall, the media proclaimed that we were on the verge of popping the real estate bubble and sales activity came to a screeching halt. Now the media is letting us know that interest rates have not been lower in the past year.
Sound bite driven decisions rarely make sense. We have become our own worst enemy. I know that your cousin Ralph told you that you should wait out the price drops before you buy. I know that your aunt Alice said that prices still have room to fall and God forbid you pay too much for your home.
I do this stuff for a living. I don’t sit in a cubicle writing articles attempting to sensationalize every wind that blows in the economic market. I don’t have to make this glamorous. I live in the real world, where people have been buying and selling homes every day, every week, every month of the year. People have bought and sold when the interest rates were around 20%. People bought and sold when they actually had to have money for a down payment. If we only go back 25 years, there are some interesting facts about real estate in the DC market area that don’t grab headlines.
Let me share.
The surge in prices over the last few years was the result of reduced inventory and historically low interest rates coupled with the introduction of interest only loans.
Real estate has always been the king of increasing personal net worth through the use of OPM (that’s other peoples money). You don’t even need a down payment with some of the programs available.
For example purposes, let us assume that you will put 10% down. If you purchase a $400,000 home, you will only need to put down $40,000. Over the last 25 years in the DC area, homes have appreciated 6.9%. The $400,000 homes value would increase to $564,240 over a period of 5 years. I am not a wizard but that is about a 22% return on the investment.
Can prices remain level or go down? Sure, that could happen. Prices in the past have gone down briefly, but the fact remains that over the last 25 years, they have averaged the 6.9% annual increase I have stated. No glamour, just facts based on verifiable information.
It gets better.
Rates can not remain low. They will have to go up, based on all sorts of fancy formulas that include stuff like M-1, the bond market and the cost of the war. We are at the bottom of this interest cycle. If you take advantage of these rates, you will be pleasantly surprised at the impact that decision will have on you. Prior to this cycle, the lowest they had been in forever was 8.31% back in April of 1997.
Back to the $400,000 house with 10% down.
A $360,000 loan at 6.25% = $2,216 monthly vs. 8.31% = $2,720. That is a savings of $504 per month and $181,440 over life of loan.
If you are in a 30% tax bracket that is a $7,000 tax deduction in year one and a $33,600 tax deduction over five years.
And now there is inventory. Of course, the level of inventory could change quickly. I don’t really care how the scribe choose to share the information. I think you have the right to understand, there has never been a better time to buy.
Of course, you could just listen to the media or relatives. This is fair warning. If you fail to act now, you will see Pogo in the mirror with you and the words floating through the air will be…………We have seen the enemy and it is us.