As I speak with my agents I am told the same story time and time again regarding clients who are still on the fence about purchasing a home in the DFW area. They are either waiting for the real estate market to drop further in order to get a better deal or they are just indecisive and haven’t come across that “dream home” yet. Each time I am told one of these stories I am concerned and the concern isn’t necessarily directed where you might think. Yes, I am concerned for my agents and want them to continue to make a living, but my biggest and most grave concern is for the people in our market that have some desire to buy, but keep waiting. Why is this so? The reason is twofold.
First, according to the Case-Shiller home price index, the Dallas/Fort Worth real estate market IS recovering. The latest released housing market snapshot released in September 2009 shows that home prices in DFW were up from June 2009 to July 2009, marking the fifth consecutive month of increases in our market. The July figure is also the highest point in the home price index since September 2008, right before the first big government bailout. The Case-Shiller data backs up other numerous reports that home price declines bottomed out in North Texas in early 2009.
"The rate of annual decline in home price values continues to decelerate, and we now seem to be witnessing some sustained monthly increases across many markets," Standard & Poor's David Blitzer said in the report. "These figures continue to support an indication of stabilization in national real estate values."
These figures point to the fact that the longer a home buyer waits in the DFW market, the more they will end up paying for their next home or investment property. However, increasing sales prices alone are not the only thing that will raise a future homebuyer’s expenses, which leads me to my second point. Rising interest rates in the face of inflation.
Interest rates today, as many of you have heard being touted numerous times from television and radio advertisements, are at their lowest in years. History and today’s current economic policies prove that this will soon not be the case. How? The answer is inevitable inflation. Most people mistakenly believe that inflation is simply rising prices. The true definition of inflation is when the supply of money outpaces the production of goods and services. It is a simple case of supply and demand. When more and more money is being printed and the supply of goods and services remains the same, the influx of new money causes all money to be worth less, resulting in the increased price of goods and services. In other words, rising prices are only a symptom of inflation and the end result of a monetary trend. Congress has recently opened the non-existent coffers and more and more money is being spent every day on stimulus packages and bailouts. We have never seen this type of government debt in our country’s history. How does the government plan to pay for this additional spending? They may raise taxes but in a declared recession, that would be political suicide. Their answer: crank up the printing presses. This, along with rising gold prices due to fear of a weakening dollar and falling bond markets (when U.S. creditors begin to worry about inflation they demand a higher rate of interest on their loans to our government. As these interest rates rise, treasury bond prices fall.) show that inflation for the United States is unavoidable.
How does this affect mortgage interest rates? Throughout history we can see examples of how rising inflation has caused mortgage interest rates to rise substantially. If you take a look at the most recent inflationary period, the late 1970s and early 1980s, inflation was extensive. The 10-Yr treasury rate reached its peak in 1982 at 15% and the price of commodities skyrocketed. During inflationary times lenders who want to survive are forced to charge more interest in order to cover the losses they experience from the devaluation of the dollar. Mortgage rates averaged around 17% during this last inflationary period. Not a good sign for things to come. Interest rates do not need to rise by much to affect your purchasing power. What does a mortgage rate increase of only 3% mean for you? A mortgage for $150,000 today at 5% interest equates to a monthly payment of $805.23 principle and interest. The same mortgage at 8% interest equates to a monthly payment of $1100.65 principle and interest. That is an increase of nearly $300 per month and over $3500 per year! Looking at this another way, to get the same $805 monthly payment at 8% interest, your mortgage could not exceed $109,500. You would have to purchase a house that is priced $40,500 less for that same payment! Talk about throwing your money away!
For an even clearer example let’s take these two mortgage balances and figure in a 10% down payment on each. Considering the interest rates discussed previously, monthly payments for principle and interest would be $805 per month for both of these homes! You would go from a:
Kitchen in a Lewisville home priced at $165,000 @ 5% interest
to a Kitchen in a Lewisville home priced at $119,500 @ 8% interest
Take an assessment of your wants and needs list. Are you willing to give up the walk-in closet, separate shower and bathtub, or the open kitchen? If the answer is NO, please consider the facts above.
Remember, a mortgage is a long-term, fixed rate debt on a valuable asset that historically increases in value over time. Fixed rate debt can be an advantageous monetary tool during inflationary times. I know of no other legal way to borrow a dollar and only pay back 50 cents. The key however is to get that fixed rate BEFORE interest rates rise. That, along with an initial low purchase price, can be your hedge against inflation and your chance to own the most home with the most amenities for the money for years to come.
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