Buying a Home: Look at the Cost, Not Just the Price

While economists and so called real estate market experts continue to struggle with where the residential real estate market is headed, with concerns of continued declining values, pending shadow inventory of bank foreclosures, and dismal unemployment figures, there are some bright spots for home buyers. When I visit real estate offices, their sales in process boards are full. The good news is Housing Affordability is RISING, and many move-up and first time buyers will be coming to the table.

An interesting thing happened last week. For the first time since April, the interest rate for a 30 year fixed mortgage increased two weeks in a row. It didn t increase much (.05%) but it was news because it had been so long since rates have ticked up. It will be interesting to see what the Fed reports today. We are not announcing that rates are headed higher. It is way too early to make that argument. However, the increase did make us look at what the bargain rates are today.

Home values have fallen to October 2003 levels as measured by the Case Shiller 20 City Index. You can buy a home today for the same PRICE you would have prior to the housing bubble. That s amazing!
The more amazing part is that it would COST you much less. You can purchase a home with a mortgage at a much lower rate than you would have in 2003. Research has found that the mortgage rate at that time was 5.95%. Today rates are at 4.5%. When we calculated what that would mean to a buyer s monthly mortgage payment.

How much would you save?
Let s assume for the sake of this example that you purchased a home and borrowed $200,000 via a mortgage. In 2003, your monthly mortgage payment (principle and interest) would have been $1,192.68. If you borrowed the same $200,000 today your monthly payment would be $1,013.37. Same house, same price but the COST is $179.31 less a month. That s a savings of over $2,000 a year! Over the life of a 30 year mortgage, you would save over $64,000.

Bottom Line, if you are considering the purchase of a home but believe that waiting is the prudent thing to do because prices may continue to soften, make sure you keep an eye on interest rates.
We have a tendency to look at just the PRICE of the house instead of the COST. The cost is actually more important.