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Rising interest rates spook you?

It has always been about the monthly cost of housing

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Rising interest rates spook you?

Rising interest rates in the past two weeks have effectively taken the monthly cost of buying this three bedroom, one bathroom, one garage home with 1,324 square feet that's priced at $132,500 at 3...

DENNIS WYATT/The Bulletin


POSTED June 11, 2009 11:12 p.m.
Forget about the bottom of housing pricing.

What really matters is how much a month that house is costing.

That is why signs are everywhere that we’ve definitely hit bottom in the South County housing market. Here’s why:

•The price of the home isn’t what matters the most, it is the monthly cost. And that cost is driven more by the interest rate than the price since when you’re done paying in 30 years around two thirds of what you spend is on interest.

•Homes that are in decent shape in decent locations are moving faster than gasoline if it were selling for 39 cents a gallon. Multiple bidding is the norm for such properties.

•It is still cheaper to buy than rent out of the gate even with rates creeping up toward 6 percent.

•Although the rate hike may have knocked out some qualified buyers for the ”median” priced home which is around $178,000 there are still plenty seriously looking.

•Those sub-$100,000 “dog” houses that linger are the ones dropping in price. They usually are snapped up once a bank makes it too good for a sane investor to pass up.

•The $8,000 tax credit available on homes that enter escrow before Dec.  1 is one sweet carrot. It basically knocks off 5 percent on the price of a $160,000 home. It is a gift courtesy of Uncle Sam that probably won’t be offered again in our lifetime.

•That $8,000 now can be applied at escrow instead of waiting a year. (Of course you still need the 3.5 percent down that an FHA loan requires.) What that does is effectively protect many potential buyers who have a faint case of interest rate shock from having to fold their tent. Given the fact at last anticipated big wave of foreclosures is rolling through the South County in July-August that $8,000 tax credit may be enough to avoid a backward slippage.

•Even if rates hit 6 percent, they are considered a great deal on a historical perspective.

Deborah Romero of Ability Mortgage is absolutely correct when she notes the higher interest rates are just “another bubble that has burst. Mortgage rates this slow were probably an abreaction.”

The reason is simple. Mortgage backed securities are flooding the market at the same time Uncle Sam is borrowing at a frenzied pace. This all works to a weaken the dollar. The hedge investors have - especially foreigners who are keeping our economy going by buying the bulk of our debt – against a weaker dollar is a higher interest rate. It is the only way anyone is going to keep buying government securities given the fact our government is borrowing at a pace that made the consumer gorging from 2000 to 2007 seem like vows of poverty.

So why do people “wait” until they think they can have their cake and eat it to in the form of 4.5 interest and the lowest possible price they can reasonably buy a house? More than a few have been bemoaning the fact that rates instead of dropping to 4.5 percent when they hit 4.71 percent are now around 5.71 percent in the span of just two weeks.

Outside of some people who think McMansions should sell for $120,000 – it just isn’t going to happen unless we’re all out on the street – it is what Realtor Tom Wilson would call “the fear of what you see in the rear view mirror.”

“People often kick themselves because they could have gotten a better deal on a house price or they could of have gotten a bit lower interest if they waited,” Wilson said. “It really is counterproductive.”

Also letting the desire to find the bottom of the market as well as loan rates control you means a “coulda” will lead to “shouda” when the train pulls out of the station. Ask anyone who tried it. Most people won’t know for 100 percent that the bottom has been reached until six months after it happens.

Wilson is right that a house being bought as a home isn’t a pure numbers game though many people seem to think so.

It’s a place where you are going to live.

That is what you will find people who bought homes 18 months ago when prices for a similar house today are often $60,000 lower and the interest was at 5.71 percent  happy with their decision.

They entered into contracts they could handle. The drop in the value of their home since then isn’t even a minor problem unless they had to turn around and sell. Thanks to the selection and minimal buyers at the time they were able to get the home that fit of much their needs and many wants that was in physically good shape and in a neighborhood of their choosing.

That flexibility has left the market today.
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