Wednesday, August 25, 2010

Low Interest Rates Does Not Equal Good Deals on Housing

I keep hearing real estate "experts" say that now is a great time to get into housing because of the low interest rates that are currently available.  Let's forget the fact that real estate experts always say it is a good time to buy housing.  They said it in 2000 at the beginning of the boom and said it again in 2007 at the peak of the housing bubble.

But let's look at the logic of this argument.  There is no doubt that interest rates are low right now.  This means that people can generally buy a more expensive house because their payments are going to be less per month as they pay less in interest.  So it sounds like a great deal doesn't it?  Get more housing at less money.

However, there is a slight problem with this.  It isn't just one person who has this opportunity for low interest rates, it is the whole country.  This creates competition for housing and drives up demand.  This is exactly what happened in the early part of the century.   Housing prices rose because people had access to cheap money.  As the money became more expensive, and the cost of housing reach unsustainable levels, the bubble burst and housing prices tumbled.

So think about the current situation.  Interest rates are once again insanely low.  They have absolutely no where to go but up from here.  We know that as mortgage rates go up, people can not afford as much home lessening competition.   There is no way that interest rates can go much more down from here so that means that they will go up.  Since we know that prices and rates are inversely related, this means that housing prices are definitely coming down.

Do you really want to own a depreciating assets?  Experts say if you have no plans on moving for several years than don't worry about it.  But who knows what your situation will be like in a few years.  In the long run, it is much cheaper to have a smaller principle payment and higher rates than the reverse as you can always refinance but you can't easily lower the principle amount on a loan.

So please, to all real estate professionals, quit trying to sell that low interest rates mean its a great time to buy.  It just doesn't add up.