Interest Rates: Buy When They’re High

I have written on this topic before but I believe it is worth reiteration, as some of you have voiced concerns recently about rising mortgage interest rates.  It is GOOD news that interest rates are going up for anyone looking to buy property.  Many articles you read will say rising rates price people out of the market, but this is true only inthe very short term.  Longer term, higher rates force housing prices down.  Whatever the economic forces at any given time, life goes on and people need to sell houses.  On the other side of the equation, buyers have a limit to what they can afford.  When interest rates are high people are forced to sell at a lower price in order to compensate and make the property affordable.  Conversely, when rates are low prices are allowed to climb.  The housing bubble of the last decade is a caricatured example of what happens when interest rates on mortgages are very low.

It is much better to buy when home prices are low and interest rates are high.   For one reason, the home can be refinanced later when rates fall, which they will inevitably do before you pay your loan off.  The initial purchase price, on the other hand, will forever be fixed.  If you buy at a high price you will be stuck with it.  Real estate investors know there is a lot of money to be made by purchasing when rates are high and selling later when rates are low.  The price trajectory runs opposite to that of interest rates.  (It’s also probably easier to sell when rates are low because people think it makes expensive houses more affordable when it really doesn’t!)  Another reason to buy when rates are high and prices are low is that you will pay much lower property taxes.  Property taxes in California are based on the purchase price of the home.  That will save a tremendous amount of money for you over time.

It is not wise to buy when rates are low because you will pay top dollar for your house.  Then there is nowhere to go.  Rates can only go up, which eliminates the option of refinancing.   And as interest rates inevitably do rise, your home value will in turn be forced down.  You could well end up in a situation where you are “underwater,” owing more on your house than it is worth.  When this happens you are automatically shut out from any refinancing options and become trapped and unable to sell and get your investment money back.  This becomes very troublesome in the event you need to move.  You cannot move without facing great financial loss, credit damage and possibly bankruptcy.  And life tends to go on- people move for all sorts of unpredictable reasons.

When you count on a low interest rate to make a house affordable you really cannot afford that house.  You put yourself in a very tight and dangerous spot.  Buying when rates are high will leave you with the proper amount of wiggle room and you’ll save a tremendous amount of money over the long haul through refinancing.

Low interest rates are only good for the purpose of refinancing.  If you are wanting to refinance, now is still a good time.  Despite the rise in rates we are seeing historical lows.  All this said, I don’t think rates are going to go high for a long time.  They may even go down again.  The “recovery” in housing you hear about in the press is government sponsored and illusory, and that’s about to run dry.  I’m guessing we’ll see low rates overall on top of continued price correction to the downside.  The post housing bubble economy is a very odd market indeed.  The best time to buy in this climate is after you see a consistent (non-government funded) climb in home prices at around the rate of inflation for a year or two.