Thursday, October 21, 2010

What Is Buying Power? Is Now The Right Time To Buy?

I get asked all the time "Is Now The Right Time To Buy?" or "Why Should I Buy Right Now" and in the past I have given a response similar to this:

"Now is a great time to buy because rates are low and prices are low. Historically, when rates are low, then prices are high. Or when rates are high, prices are low. So, this is truly a unique market in that you have the best of both."

Don't get me wrong, I think that is a fine answer to give, especially since it was the answer that I have been giving to people. And, to some people, I think that answer resonates. They get it. But to others, maybe not so much. So, today I thought I would take a different approach and really throw out an analysis as to if it is a good time to buy or not.

It is no secret that prices in real estate have taken a hit. According to numbers released from the NAR (National Association of REALTORS), at the end of 2009, the national median selling price of a home had reverted back to what they were in 2003. But since then, nationally our median selling price is up .7% this year and if you look just at Midwest numbers, that number grows to a 2.2% increase over last year.

So it appears that we have hit bottom on price and could be back on the incline again.

Now, let's look at interest rates.

Today I traced interest rates all the way back to 1963, I didn't feel the need to go back any further to prove my point. Since 1963 we are currently at our lowest point in mortgage interest rates which are currently at 4.375% as of this morning. As you can see by looking at this chart that I made, with only a couple of exceptions, interest rates go UP a lot faster then they go down. And since interest rates are in the low 4's, an area they have not been before, it would make sense that they may not be going down any further. Or at least not much further. It would also make sense, that interest rates will start to climb, even if it is by only 1/2% or by 1%.

So, why does this make a difference? After all, a low interest rate is a low interest rate, right?

True, but the low interest rate along with the low price effect something called buying power. People love to get the most for their money. And right now may very well be that time.

As you can see by this chart that I made, the payment stays pretty much the same throughout. But look at the interest rates and the buying power. As the interest rates go up, you cannot afford as much house. This was all based off of an original purchase price of $100,000. If the original purchase price were even higher, the difference would be even greater.

Now, take that prices are back at 2003 levels which means that $100,000 house today may have been a $115,000 house or more 3 years ago, and it is easy to see how great today's Buying Power actually is.

Hopefully that explains to you why the current real estate market IS the right time to buy, especially since prices and rates may start creeping back up again.

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