Home ownership: Why it makes sense to buy now, even before the bottom

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Calling a bottom in any market is as close to impossible as it gets, and experts are divided. Star analyst Meredith Whitney recently said that real estate has much further to fall, but other experts say that the increase in sales even as prices continue to decline suggests that the market is cycling through inventory rapidly and paving the path for a leveling off in housing prices.

But here's an interesting thing: With mortgage rates as low as they are right now, it might be worth buying a home even if prices are going to fall further. Take a look at some numbers I put together based on what will happen if prices continue to fall but interest rates rise. Consider that you are looking at a house that would require you to put down $300,000, but you think it could fall by another $20,000-$40,000 over the next couple years:
  • $300,000 Mortgage
  • 30-Year Fixed-Rate Mortgage at 5%
  • Monthly Payment: $1,610.46
  • $280,000 Mortgage
  • 30-Year Fixed-Rate Mortgage at 6%
  • Monthly Payment: $1,678.74
  • $260,000 Mortgage
  • 30-Year Fixed-Rate Mortgage at 7%
  • Monthly Payment: $1,729.79

In other words, if you're looking at a home that would require a $300,000 mortgage now and you wait for it to fall to $260,000 but interest rates jump from 5% to a more normal 7% because of inflationary fears, your monthly payments will be $120 higher on a house that is $40,000 cheaper.

And here's the kicker: There is no guarantee that home prices will continue to fall in most markets. But it is an absolute certainty that interest rates will eventually head much higher.

If you're planning to buy a home and then quickly move on to another, the low monthly payments that are available won't be enough to compensate for the beating you'll take when you sell if prices fall. But that just brings us back to the age-old wisdom that homes should be purchased as long-term investments and providers of shelter, not as short-term opportunities to profit from speculation.
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