It has been a great time to buy a house for a while now. But seriously, now is the best time to buy a house in recent history. Interest rates are at all time lows…today’s rate was 3.875% for a 30 year loan. Prices have not recovered from the depreciation we saw 2008-2009. And the kicker is that there are LOTS of foreclosure properties on the market, with signs that it will continue for a bit longer.
These low interest rates are really incredible. When rates were at 5% last year, everyone was talking about how incredible those rates are. Now they are 20% reduced from that “historical” rate. Let’s look at an example. The monthly payment is about $1,000 for a 30 year loan at 5% with loan amount of $186,000. If you reduce the interest rate to 4%, you can pay that same $1,000/month for a $209,000 loan amount. So with 1 point lower interest rate, you can afford $23,000 more of house!
Home values stopped appreciating in 2007. And from 2008 to 2009, there was a large depreciation in home values…about 9% in Dane County. We still have not seen much appreciation since then. As the market has corrected home values, interest rates have continued to get lower. So in addition to homes becoming more affordable based on purchase price, they also became more affordable with the financing. A house that cost $200,000 with 6% interest rate in 2007, might be around $180,000 now with a 4% interest rate. That same house just 3-5 years later is now $340/month cheaper in terms of monthly payment on a 30 year loan!
Foreclosures are one reason we are seeing this great buying market. There are many foreclosure and short sale sales (distressed sales), so many that it has effected the market. And even though foreclosure filings have been down the past few months compared to 2010, there are signs that there is a very large shadow inventory and that these high volume of foreclosure listings will last at least another year. Donald Trump said this about the current housing market: “This time is a great time to buy a house, but only if it is owned by a bank. If a bank already owns a house, they are dying to get rid of it…”
The National Association of Realtors Housing Affordability Index hit 183.7 in August, near its record high in data going back to 1970. Take advantage of this great housing market! If you are renting right now, get pre-approved for a mortgage loan. If you are a home owner, think about purchasing an income property and get pre-qualified to see what you can afford. If you don’t want to be a landlord, then budget the cost of hiring a property manager in your cash flow calculations. This incredible buyer’s market won’t be around forever!