Buy house now or wait

[marlon]

Let's say one is firm that will live long-term in a certain region (in reality the region I am talking about is Northern California, near Napa).

Then I see some old houses avaiable in a neighborhood I really like for $450k. I would like to buy one and rebuild (using cash) in few years. Before these houses cost $700K. At 4% interest rates, mortage would be very close to rental price around here.

Question:
Some noble members in this forum gave me advice to wait until further decline happens (which may well happen given the severe imbalances in the worldwide economy. I believe things are not going to be pretty). My question is, I believe that in 2-3 years, we may well see interest rising quite a bit. So if I wait till house prices decline but interest rates go up, isn't that a bad idea to wait? In my case I do have cash for a substantial downpayment, but I prefer to keep my cash overseas than briging to the US. I am afraid the dollar may one of these days lose value for good. So my point is, I'd like to discuss and see if I get 4% or lower interest rate and that is close to rental price, why not buy it now? Why wait if interest rates go up?

[stannius]

If you plan on living in the house forever or another long period of time, unless you expect prices to drop a lot, I think it would behoove you to buy sooner rather than later. For instance if house prices drop 10% but interest rates go up 1%, your monthly mortgage payment would be slightly higher than if you bought today.

That's assuming, of course, that you can find an acceptable house in today's "falling prices falling supply" market.

[Scotsman]

The question you need to answer is this- why will interest rates go up? If they go up primarily because of inflation and the expectation that the economy will be heating up then house prices will rise with interest rates.

However, if rates rise because lenders are finally demanding a risk premium (and the federal government has backed off their interventionist games) then home prices will likely fall as rates rise. Decreasing affordability and little expectation of future inflationary gains or offsets will be the deciding factors.

I personally feel that rates will eventually rise due to a shortage of lendable cash, demand for a realistic risk premium, and the end of government support. Incomes will remain constrained- little inflation expectation, high unemployment, increasing global competition, etc. the result will be a double hit to home prices and another 20+% down.

Remember, in a country with a median family income (flat or falling) of of around $50K a $450K house is well beyond the reach of most. I would expect that price range to continue being hit by price declines for some time.

As incomes and rents continue to fall the rent/buy comparison will become less positive.

"Real median household income in the United States in 2010 was $49,445, a 2.3 percent decline from the 2009 median"

http://www.census.gov/newsroom/releases ... 1-157.html

[Robroy]