I would like to (some day) buy a house, preferrably in Brooklyn. However, the housing market in my part of the world has gone up to the point where a burnt-out, rat-infested, 1 bedroom, moldy hovel in a decent neighborhood is going to cost $300K minimum.
While I do have some money saved, not nearly enough to make a decent down payment on a house at that cost. (Fact of the matter is, I wouldn’t want to spend that much on a burnt-out, rat-infested, 1 bedroom, moldy hovel even if I could afford it, but that’s beside the point at the moment…) Since I also want to keep the money I have saved somewhat liquid in case of emergency, I have it sitting in a money market account earning a paltry 2 - 2.5%.
I’m figuring that the housing prices are being driven up by the low interest mortgage rates. In addition, I’m figuring that those same rates are holding my bank account interest rates down.
So, then, I would think that higher interest rates would (a) cause the housing market to fall a bit and (b) pick up the bank account rate. I’m certainly willing to pay an extra $30,000 in interest if the fall in housing prices will cause the price to drop by $60,000.
So, should I be hoping for interest rates to go up; or is my reasoning completely flawed?
A rise in interest rates will likely reduce the rate of increase in market prices not reduce the actual price. Unless of course there is a large sudden and perhaps substained rate hike. Sellers are resistent to reducing prices they thought were in effect a month or year earlier.
There is only one way to actually predict the direction or amount of interest rate changes. Do it frequently. Occasionally you will be right.
I think the first flaw in your reasoning is assuming that house prices would ever go down at all (or if they did, very much). The second flaw is in figuring what that rise in rates would do to your eventual mortgage payment. For example, right now rates are about 6.0% for a 30-year fixed rate mortgage. If you borrowed $300K for your house, your monthly payment would be $1798.65. Now, suppose interest rates jumped up to 8.0% (still not a bad rate, historically, right?). Now your monthly payment for the same $300K loan is $2201.29. Ouch. But, you say, the house price might drop by $60K. In that case, your monthly payment on $240K would still be $1761.03. Not much of an improvement.
I guess the real question is: would rising interest rates drive the price of a home down more than it would raise the amount of your interest payment? My WAG is: not a chance.
Of course, I’m willing to defer to anyone who actually knows anything about the Brooklyn housing market.
Well, the numbers I was using were made up (for amount saved or spent with an interest rate change, not the housing price) for illustrative purposes. The real number could be higher or lower.
But Zut hit’s it dead on, any decrease in price due to an interest rate hike would be offset by how much you’s pay a month. And since Sellers are unwilling to drop the price dramatically, you most likely would end up paying more per month. A 400k house @ 0% is gonna cost you the same per month as a 50k house @ 60% <----math is probably wrong there, but you get my drift The benefit you get buying with int. low is equity, the benefit you get buying while int. is high, is the possibility of refinancing someday, so you only pay the high monthly costs until rates lower. That could be 1 year, it could be 30.