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Don't Chase The Housing Market Crash Because Interest Rates Went Up!

There are a lot of assumptions in the title of this blog. So what do I mean when I say 'don't chase the housing market crash because interest rates went up!' ? In years past I've worked with clients that missed out on a good opportunity because they were waiting for home prices to decline. So the assumptions are the housing market will crash and interest rates will go down as quickly as they went up. I've been through 3 markets since 2003; 2 up and 1 down. We are on the edge of the cliff of the next down market.


One thing I know for sure is all this click bait about the housing market is just noise when it comes down to the basics - what's happening in the market today, you've got to live somewhere and how much money will you gain or loose over the next 10 years. I use 10 years as a bench mark because our economy generally cycles every ten years 'or so'. This last cycle has been longer than 10 years - 2009 to 2022.


For clarification, this example is not about a huge spread, like the difference between 2.5% and 7%. But how about what's happening as of the writing of this blog, April 2022, after the Fed raised rates by a quarter point? Rates went from about 3.2% to 5.2% very quickly. For the sake of consistency I'll use a median home price of $750,000 along with the conventional mortgage down payment of 20%. Property taxes and insurance are part of the consideration, but this blog is about interest rates, so I'll stick to the principle and interest monthly payment.


If you bought a house today for $750K at 5.2%, the 30 year amortized monthly principle and interest would be $3294.67. At 3.2% it would be $2,594.80. That's a difference of $699.87. Not an insignificant amount of money! Compare that to current rents (around the same or more) the 'forced savings account' of accrued equity and the tax savings (yes, the IRS gives you a break for owning a house), then putting to use $699.87 is better than paying someone else's mortgage. The real take away is the amount of interest you pay. $750K at 5.2% for 30 years is a total of $586,079.50 At 3.2% it's 334,128.43. So that's a no brainer, right? Who doesn't want to pay less interest for anything, let alone the most valuable asset they own.


Here's what happens if you chase the market downward and wait for a significant price change to justify a purchase while interest rates remain the same (interest rates are rarely low in a housing crash market). Again, assuming the median price point of $750K and the housing market 'crashes' by 10%. The purchase price would be $675K at 5.2% for a monthly principle and interest payment of $2965.20 with a total of $527,471.55 in interest payments. A BIG difference of $58,607.95. So that's a no brainer right?


In this bracket of the average home price, the buyer's qualifying income to purchase said average priced home is much greater than $58K. I'm no saying it's an insignificant amount of money as much as it should not be the 'greatest' factor in your decision to buy a home. How long will it take to correct 10%. Will the house you buy in a down market be worth lest the next year? While this a simple calculation on interest rates, current market conditions are never that simple. Who new about things like a pandemic, or the invasion of the Ukraine by Russia. This is why I reiterate NOBODY can tell you what will happen in the future. Make your decisions based on what's happening in the market today, you've got to live somewhere and how much money will you gain or loose over the next 2 years is a short term site line.


I hope this helps. I'm happy to guide you with your California real estate sales and purchases.

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