Tuesday, November 01, 2005

Stretching to Buy Your First Home in the Bay Area

Since I'm a full time REALTORĀ® working in the East Bay Area in California (Berkeley, Oakland, Albany etc.) where the average median home priceis approaching $600,000, I'm well aware that oftentimes buyers are using every resource available to them in order to sqeeze into their first home.

I was reading this "Incomes falling short of home prices" post by Janis Mara in the Inman blog and these lines jumped out at me.

For the sake of the common person, it seems like a price drop could be a godsend. Interestingly, a few Realtors at the National Association of Realtors convention last weekend said something similar.

It reminded me of an unwritten post that I've had in my head for a while now.

Here's the short version:

A drop in housing prices would most likely be coupled with higher interest rates. Assuming home buyer's (especially 1st timers) are strecthing themselves to qualify for a loan at a certain monthly payment, each 1.5% rise in interest rates translates in a 17% reduction in buying power.

Taking the recent upward movement of interest rates (which were at historic lows) in account, my feeling is that any potential gain in housing affordability from falling prices will be offset by rising interest rates.

So, if you're a potential 1st time homebuyer trying to decide if the time is right to buy, the question you should be asking yourself is this, "What is more likely to happen. Are interest rates going to rise 1.5% or are housing prices going to fall 17%?" The mortgage payment will be the same.

Not to mention, you may lose some tax benefits if you wait.

Flickr credit PPDIGITAL, under Creative Commons license