Seattle Bubble

I filmed a brief interview for Q13 News a few weeks ago. Below is the resulting story they’re running today. If you’re a new reader that saw me on TV, welcome. Please take a few minutes to read our about page to learn more about this site.

Not too surprisingly, they put a pretty positive spin on the whole thing. The word they were getting from all the real estate “professionals” that they spoke with was essentially “buy now, look how low rates are!”

I didn’t say that now was a bad time to buy, because it isn’t. However, I also didn’t say that everyone should just jump in now and buy buy buy. Prices are still falling in Seattle, and will likely continue to fall for the next 6-12 months (at least). If getting the lowest price is important to you, now is probably a good time to take a “wait and see” approach.

I also gave the reporter the following examples of the monthly payment math based on low interest rates vs. falling home prices. The payment below refers to the total monthly payment of PITI (Principal, Interest, Tax and Insurance).

• $400,000 home, $40,000 down, 5% interest: $2,366 payment
• $400,000 home, $40,000 down, 4% interest: $2,152 payment
• $360,000 home (10% price drop), $40,000 down, 5% interest: $2,113 payment
• $360,000 home (10% price drop), $40,000 down, 6% interest: $2,314 payment (still lower than the first scenario)

In short, jumping into the home buying decision primarily because of low interest rates does not make any sense. Refer again to my five self-examination questions:

• Do you like the home well enough to stay there for at least 5-10 years?
• Do you feel that the home is priced fairly?
• Can you afford it using a conventional 30-year fixed-rate loan?
• Do you have a minimum 3-month emergency fund that is not part of your down payment?
• Would you be able to handle it both financially and emotionally if the value of your home dropped considerably after purchase?

If the answers to all of these are yes, then maybe now is the time to buy for you. Note that interest rates only factor in to one of the above questions.

Addendum: Jillayne makes an excellent point in the comments below:

I’d like to lobby hard to add one more thing to Tim’s list: What’s your plan B if you decide that you need to sell the home (for a million different reasons) but cannot sell.

Can you RENT it out for enough to cover the payment so you can move someplace else?

Having a plan B helps a person sleep at night but maybe I’m just too fiscally conservative.

I don’t think that’s too conservative at all. You should definitely have a “Plan B.” Again, keep in mind that my five questions are a minimum. Ideally, my personal preference is to plan on stay ten years or more, have 6-12 months of cash reserves, and even be able to afford the house on a 15-year mortgage.