Thursday, August 5, 2010

Bad Time to Buy a House?

The perpetually positive Realtors of the world are essentially always saying that it's a good time to buy. The government made it a matter of national policy, through the wasteful "home buyer's tax credit," to get more people to buy houses. But is it really a good time to buy?

One thing that I think many people don't understand is the relationship between house prices and interest rates. Yes, it looks very attractive right now to buy a house to utilize record-low mortgage rates (around 4.5% these days). Wow, that's an amazing deal, right?

But the point is that interest rates are at record lows. Where do they go from here? Naturally, the only way they can go, eventually, is up. What happens to home values when interest rates increase? They go down. Let me demonstrate.

Let's say you have $10,000 to put down on a house and you can afford a monthly payment of $800 a month. This means you can finance about $160,000 (this does not include taxes, insurance, etc).

What happens if interest rates go up to 5.5% Now you can finance about $142,000 for the same monthly payment.

How about if interest rates go up to 7%? Now you can only finance about $122,000.

Do you see how interest rates decrease home values? If suddenly everyone loses $20,000-$40,000 in purchasing power, home prices will theoretically drop by that much. This means that if you buy now and interest rates go up, your home value will drop and you will lose value. This is exactly what happened in the last three years and lending standards and defaults have dramatically changed the housing landscape.

But, then again, there's the counter argument that the unsustainable and destructive national debt can only be paid back through hyperinflation. You can gamble and hope that this happens, which would end up wiping out your debt for pennies on the dollar. Maybe that's the politicians' long term plan - hyperinflate so that a wheelbarrow of worthless money will pay off everyone's now-worthless mortgages. Then again, that wipes out everyone's life savings at the same time. Oh well, at least everyone will have a wheelbarrow of cash!