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2010-10-22 12:35:36
When will the market hit 'rock bottom'?

Do you want to know the most common question I have been asked over the past year as a real estate agent? Do you also want to know the most difficult questions to answer? Well you already know the answers to these questions if you read the title to this article. 

The difficulty in answering this question is knowing first how to define 'rock bottom.' In general there are four different factors to consider when determining 'rock bottom':

1) Type of real estate (condo vs. single family residence),

2) Area/Location,

3) Home prices for 1 and 2, AND

4) Interest rates and mortgage options.

Most buyers have predetermined answers for the first two factors and are requesting answers for the third factor, home prices.

What most buyers don't take into account, however, is the current status of interest rates and mortgage options. For cash buyers, factor 4 does not aply; but not enough buyers are taking into account todays amazing interest rates coupled with new mortgage options that will likely change in the near future. 

 Prior to the mortgage crisis, interest rates averaged 6-7%. There were also many 0% down payment options, but these were sub-prime loans (simply, loans given to individuals with bad credit or without sufficient income history) and are no longer available today. 

Today, interest rates are between 3.75% and 4.25%!! There are also many amazing loan programs available to those with good credit as a way to stimulate the real estate market, including two 0% down payment mortgage options:

1) USDA Rural Housing - home must be located in defined rural area (ex: Spanish Fork south, west of Lehi) but there is no mortgage insurance premium and no monthly mortgage insurance. This is a great deal for those who would enjoy living in a rural area plus there is a much better bang for the buck in rural areas. 

2) Utah Housing - home can be located anywhere in Utah. This is an FHA loan but Utah Housing pays the down payment (as a second lien) at a slightly higher interest rate for the small portion of the down payment. This is a great option for those who qualify for financing but don't have the 3.5% to put down. These loan programs will not be around forever and could disappear as soon as the market is determined to have recovered. 

Here are some examples to demonstrate how important interest rates and loan programs are in determining when it is best to purchase. These examples assume prices will continue to go down next year, which actually doesn't appear to be the case.

Example #1 - Home in Saratoga Springs

1) Purchase this year for $250,000 with the USDA RD loan at 4.25%
Down Payment - $0
Monthly Payment (Principle and Interest) - $1,230 (no mortgage insurance on these loans)
Total Interest Paid -  $193,000

2) Purchase next year for $240,000 with FHA (USDA RD loan no longer available) at 5.5% (could be higher)
Down Payment: $8,400
Monthly Payment (Principle and Interest) - $1,330
Total Interest Paid - $223,000 

Although the home was purchased for $10,000 less, the down payment was $8400 compared to $0, the monthly payments increased $100, and total interest paid increased $30,000. That $10,000 saving on the purchase price doesn't look so good right now. 

3) Purchase nest year for $230,000 with USDA RA loan but interests rates up to 6.25% (and interest rates will get back to this level in the near future)
Down Payment - 0% 
Monthly Payment (Principle and Interest) - $1,415.
Total Interest Paid -   $280,000

The home was purchased for $20,000 less but monthly payments increased $185 and total interest paid over the life of the loan increased by $87,000!! That shows how important interest rates really are in determining rock bottom!!  


Example #2 - Townhouse in Provo

1) Purchase this year for $150,000 with FHA loan at 4%
Monthly Payment (Principle and Interest) - $700
Total Interest Paid -$94,000

2) Purchase next year for $135,000 with FHA loan at 5%
Monthly Payments (Principle and Interest) - $715
Total Interest Paid - $112,000

So even if the townhouse dropped another full 10% in value, if interest rates go back up just 1%, monthly payments increase $15 and total interest increases almost $20,000. 


Example #3 - New Large Home in Mapleton

1) Purchase this year for $400,000 with 20% down with 30 year conventional loan at 4%
Monthly Payment (Principle and Interest) - $1,525
Total Interest Paid -$230,000

2) Purchase next year for $380,000 with 20% down with 30 year conventional loan at 4.5%
Monthly Payment (Principle and Interest) - $1,540
Total Interest Paid - $250,000

Even with a savings of $20,000 on the purchase price, an increase of just .5% in the interest rate results in a slightly higher monthly payment with $20,000 more paid in interest. In other words, the home will cost more even though the purchase price was $20,000 less!!


As stated previously, all of these examples assume prices will continue to fall. There is a much better chance, however, that prices will stabilize and begin to appreciate in th near future, in addition to interest rates also increasing. 

Obviously, for an investor who plans to purchase real estate with cash, 'rock bottom' is easily defined as the lowest home prices for that particular type of property in a chosen location prior to the market recovering and prices holding steady or beginning to increase.

Determining when home prices will be at their lowest is very difficult as I misplaced my crystal ball and lost my ability to predict the future. But through observing trends and studying the market, it is definitely possible to make some highly educated guesses.

 

Here are some graphs to help demonstrate various real estate trends:


1) Central Utah County Condos and Townhouses built 1993 or newer - Notice that the home buyer tax credit definitely had an affect on homes in this market but prices appear to be stabilizing. Depending on the location, I really believe these homes will stabilize next year and begin appreciating again in 2012. 


Central Utah County Condos and Townhouse built 1993 or newer


2) Single Family Residence, Central Utah County, 1500-3500 sqft, 1+ car garage, 15+ acres, built 1995 or newer - Notice how much closer the prices have been in the last 4 quarters with a slight increase in the median house price during the last quarter. 


Single Family Residence, Central Utah County, 1500-3500 sqft, 1+ car garage. 15+ acres, built 1995 or newer


3. Single Family Residence, Central Utah County, 3500-6500 sq.ft, 2002 or newer, 3+ car garage, at least .25 acres - These are the homes that took the largest hit during the real estate recession; almost a 35% decrease in the median house price from a high of $565k to a low of about $380k. For buyers who have always wanted to buy their dream home but could never afford it, many of them now can. Notice that not only have prices stabilized, but they appear to be on the rise. 


Single Family Residence, Central Utah County, 2002 or newer, 3500-6500sqft, 3 car garage .25 acres


4. Condos and Townhouses in Rural Utah County (south of Spanish Fork and West of Lehi), 1998 or newer - notice prices have plummeted to what many of these properties originally sold for when brand new. This trend cannot continue to be this drastic and I expect a much better 2nd and 3rd quarter next year. The current median home prices are at 2000 and 2003 amounts!!


Condos and Townhouses in Rural Utah County


5. Single Family Residences in Rural Utah County, 3000-5000 sq.ft, 2+ car garage, 2002 or newer - Home prices are at 2004 and 2005 levels. That is prior to the real estate boom and many homes are being sold for cheaper than what they cost to build. Although the prices dropped shortly after each of the tax credit deadlines, I really expect to see prices stabilize and increase over the next 6-12 months. 

 

Rural Utah County, SFR 3000-5000sqft, 2 car garage .23 acres 2002 or newer


So to answer the magic question, has the market hit rock bottom, I can honestly say for buyers relying on financing to purchase, the answer is an astounding YES!!! There are no indications that home prices or interest rates will dramatically increase over the winter, so purchasing anytime before the Spring rush would be very wise. I plan to buy during this time frame so I can claim that I will practice what I preach. Sure some month in the next 6 months (maybe 12) could be the absolute best; but the stars are aligned so well right now. 

Sure it is hard to take the step and jump in, but it will be even harder for those who waited to watch both home prices and interest rates go back up. Remember, we won't know

 
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