This is a question that may have a surprising answer. Many peoples’ first instinct is to conclude that if prices are falling, it would be smarter to wait for your dream home to decline in price and to buy at a later date and lower price. However, interest rates play a significant role in the home buying process and should also factor into the decision.
The truth is, interest rates are at historic lows and, as the graph shows, have not been lower in at least 45 years. The government has pledged to buy mortgages to help keep rates low, and they have done a great job keeping interest rates between 4.50% and 5.00% over the past few months. However, the government’s help won’t last forever and investors will need the higher returns they’ve demanded in the past. Without that support, interest rates would likely be significantly higher right now. With rates so low and the government intervention fully priced into the market, there is a greater likelihood that they will move up not down.
That being said, how much effect would an interest rate increase of 1.00% make? If you were purchasing a property for $400,000 and interest rates increase from 4.50% to 5.50%, how would that affect your payment? At 4.50%, with new VA loan and no money down, your payment would be about $2070 per month. Now, if interest rates increased 1.00%, that same loan would cost you about $2320 per month. That’s an increase of $250 per month!
Of course, if home prices are declining, the savings from buying the house at a lower price should save you more money, right? If prices declined 5% in the next year, the price of the home would go from $400,000 down to $380,000. The mortgage payment at that price is still about $2204 per month at 5.50%. So, even though the price decreased 5%, your monthly mortgage payment would be almost $135 more per month. If the prices dropped a full 10%, you would still be paying $20 more per month. What may be even tougher to comprehend is that if you use a VA loan with 100% financing to purchase the home, you wouldn’t be saving money on the down payment because none is required.
But isn’t an increase of 1.00% in the interest rate a big jump? It’s true that a 1.00% increase in rate isn’t very likely to happen overnight, but we have seen rate movements of that magnitude several times in the past year alone.
There are other things to consider as well, like how much you are currently paying for rent, the tax benefits of owning a home and other personal factors. Regardless of the interest rate environment, our advice is to find a payment you are comfortable with and match a house to it. If the home meets your desires, go for it. Hawaii is an island with limited real estate and many people who would love to live here. There are many locals who live away and are waiting in the wings to come back if the prices decline enough. As long as price is a deterrent for some, it shows that there is no shortage of demand for housing in the islands. So take a look at what today’s interest rates can allow you to buy and make an informed decision. Good luck house hunting!