Are we there yet?
As Summer winds down to a close and vacations come to an end there's a better than average chance that you heard the question "Are we there yet?" during one of your outings. In my case I hear it from clients on almost a daily basis, only the "there" they are referring to is the bottom of the real estate market here in Mendocino county. Part of me wants to say yes, but in truth the answer is no. Prices are continuing to decline and that's not terrific news for Sellers, but it's good news for Buyers. Let me re-phrase that... it's good news for Buyers with good credit AND an adequate down payment... IF they hurry.
I'm qualifying that statement because even though prices are declining, home loans are becoming increasingly harder to get. Higher credit score requirements and down payment requirements for conventional financing have pushed home loans out of the range of many prospective Buyers. To the rescue? FHA and VA backed loans are the only alternative for many Buyers... especially first time buyers. With a 3% down payment and good credit you can still get an affordable mortgage. That's the good news. On the horizon are some dark clouds and they are made up of higher interest rates. The people that I am talking with think that we will see interest rates in the high 7% to the mid 8% range by the end of the year. I hope they are wrong, but with such a weak dollar, the easiest fix to improve performance is to raise rates.
This will wipe out much of the benefit that a Buyer may gain by waithing for the bottom of the market. To put it in perspective: A principal and interest payment on a $300K dollar mortgage at 6.25% is about $1847.15 per month that same mortgage at 7.25% will cost you $2046.53 per month and at 8.25% expect to pay $2253.80 per month. To get the same payment at 8.25% as you had at 6.25% you can only afford a $250K mortgage. That scenario will require prices to decline another 17% from the decline we've already experienced. I guess it could happen, but is it worth the gamble?
What I'm seeing happen right now is Buyers coming into the market (investment and homeowner alike) and taking advantage of the interest rates and at the same time asking the sellers for a deeper discount thatn they did before. It gives them the best of both worlds for right now, but how much longer are the interest rates going to stay down? I'd like to hear from you if you have any input.