Purchase Price V Interest Rate

Today's buyer is facing a conundrum of epic proportions. It is obvious to most that in many areas of Southern California, prices have flattened out. Luxury sales have slowed dramatically. And, all indicators are that sometime in the near future, we will see a slight adjustment in home values.

For that reason, many buyers are thinking that the wise move would be to hold off their purchase. And, most likely get the home they want for less money. And, it is true that historically this would have been a good strategy to employ. Today, I am not so sure.

In fact, I am telling my friends and family that today, may be the very best time to buy. That there may not be better time to purchase in their lifetime. Let me explain.

While it is true that home values are at near record highs for most of the South-land. It is also true that interest rates are still in the high three percent range for a thirty year fixed rate mortgage. And while property values may drop slightly sometime in the next year or two. Interest rates will rise dramatically over the next year or two.

For most of our lives, we have seen a thirty year fixed rate loan average 8.5%. Today money is on sale and thirty year fixed rate loans can still be had at 3.85-4.25%. However, the fed has indicated that there will likely be three increases this year in the rate banks pay to borrow money. It stands to reason that if the banks are paying more, everyone will pay more.

And, to be fair, the government needs this rate to go up so that they can expand our economy. So it is unlikely that we will see these types of interest rates again any time soon.

As interest rates rise towards their historical averages, the average home buyer will have less and less buying power. So the home that they can afford today most likely will be priced out of their reach tomorrow, even if prices fall.

Buyers typically think that sales price is the number one priority in selecting a home. And, while it matters, the number one deciding factor is monthly cost. Today nationwide the average homeowner spends approximately 15% of his monthly income on home expense. Traditionally that number would be closer to 40%.

Buying today, makes sense. Especially if you intend to stay in the home for the next 5-7 years or longer. There is an old saying that I subscribe to and that is "It is not nearly as important when you buy as it is when you sell". Since 1976 property values have risen an average of 4% per year even when you take into account the peaks and crashes that we experience every ten years or so.

Home ownership is the single best wealth determiner that we have. And sadly, today in California we are at a fifty year low percentage of homeowners versus renters. Sometime in the next five years, sadly there will be more renters then homeowners in the Golden State. This is a tragedy.

So my message today for buyers is buy today. Plan on staying, and enjoy all the benefits of home ownership in the years that follow. Tomorrow it will be a harder dream to realize.

See you in escrow.


  1. Actually think we are back in a bubble. I expect homes to start dropping end of 2017, perhaps early 2018. Unemployment for Retail jobs dropping already and full time employees being shifted to part time. Condominium/Townhome purchases heating up as more fixed income seniors and younger families tying to get into the market for the first time. With cost of health insurance being unpredictable based on current political administration efforts, we are likely to see families having to spend part of normal housing budget to keep medical coverage. Agriculture markets will suffer as prices go up based on Immigration policies. This has a direct impact on CA. Hard for any of us to predict what will really happen but if you are currently renting it may be more difficult for you to qualify later on. I can only tell you that in 2015 I purchased property in Kent WA for 250K. The property is now selling for 375K. Tacoma Markets have experienced the same jump in prices. Over 500k prices are slowing down.

    1. You are right when you say that no one can predict with certainty what the future holds. But when we look to the past we can see a steady 4% appreciation over time. Also, real estate is a local business and what is happening in one part of the country may not be reflective of what is happening in other parts. In our market today inventories remain low, which is stabilizing our market. I regularly review the work of some of our top economist and no one is predicting the bubble effect that we saw in 2007 because of the standards used for qualifying today. And, with a shortage of homes today with too few new homes being built to make up the difference, housing in So Ca will most likely remain strong (not unscathed) for the foreseeable future.


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