Home prices continue to fall, does it pay to wait?

February 02nd, 2011

A national index reports that home prices across the country have fallen for the fourth month in a row. Is this good news for those seeking to purchase a new home? How are you affected if you are using a prequalification calculator to determine your purchasing power for a new home loan? If home prices are falling does it make sense to wait for prices to drop further even though mortgage rates have been rising?

Home price data

The S&P Case-Shiller home price indexes are based on the three-month average of home prices in major metropolitan areas. As you would expect from their names, the 10 City Index gives home price information for ten major metropolitan areas, the broader 20 City Index covers 20 areas.

In August 2010 the index declined for the first time in four months, and it has declined in each report provided by Case-Shiller since. In November 2010 prices in most markets analyzed were higher than spring 2009 which was a low price mark for the indexes since the housing bubble began to burst in 2007. In eight markets, however, prices dropped below the spring 2009 levels, signifying for those markets (Atlanta, Charlotte, Detroit, Las Vegas, Miami, Portland, Ore., Seattle and Tampa) the possibility of “double-dip” in home price declines.

For November 2010 the 10 City Index declined 0.8 percent from October 2010 and was down 0.4 percent from November 2009; the 20 City Index saw a 1.0 percent decline from the prior month and a 1.6 percent drop in prices from the prior year. While the overall decline is relatively small from month to month, a one percent drop on a $300,000 home is $3,000.

What it means for homeowners

The impact of the data is a continuing decline in prices showing little to no recovery in most markets. For homeowners this means their equity continues to shrink, reducing their proceeds if they were to sell, or putting them further underwater if their mortgages are currently more than their home’s value.

There were some bright spots in the Case-Shiller report. California appears to be rebounding with increases in year to year prices for three major metropolitan areas, Los Angeles up 2.1 percent, San Diego 2.6 percent and San Francisco 0.4 percent. Leading the positive price club is Washington, D.C., showing an increase of 3.5 percent, the highest increase in the nation.

Impact of prices on homebuyers

If you are buying a new home the obvious impact of dropping prices is you could purchase the same home in November 2010 for less money than you could in October 2010 or November 2009. But having waited will you have saved money in the long run? The answer today is “yes” since both prices and interest rates in November 2010 were lower than November 2009.

The next question you ask as you calculate payments and closing costs with the mortgage calculators is “will it benefit me to wait longer and have prices drop even further?” To answer this question use the compare loans calculator with a higher interest rate and lower loan amount for the second loan. If the average decline in home values is 1 percent per month and interest rates have climbed over one-half of one percent since November 2010, are you paying less for your home or more because of your higher mortgage payments.

Take a $300,000 home with 10 percent down in November 2010 with an interest rate of 4.17 percent (the Freddie Mac rate in mid-November) and input the numbers into the compare loans calculator for a $270,000 mortgage at 4.17 percent and a 30-year fixed-rate loan. Now for Plan 2 input a mortgage based upon a $294,000 purchase price, a reduction of 2 percent since November assuming the drop continues at one percent per month. The mortgage is $264,000 and the rate for the most recent week from Freddie Mac is 4.74 percent.

As you can see, the home that has declined in value by 2 percent since November will now cost you more money to purchase since higher interest rates mean your monthly mortgage payment will be approximately $63 per month higher, or $500 per year. By waiting to purchase your home did you really benefit?

Posted By :
Dennis C. Smith is co-owner and broker of record for Stratis Financial in southern California. He has over twenty years' experience in the mortgage industry.

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