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The Total Cost of Purchasing a Home Is at the Bottom, Now Is the Time to Buy and Lock In a Fixed Interest Rate

By: Steve Johnson

8/19/2009 - 16 Comments

The market bottom that I’m talking about is the combination of low housing prices and rock bottom interest rates. 

Don’t get me wrong. I don’t think that housing prices are at the bottom.  In my opinion, housing prices are likely to continue to drop another 5-20% for the next several years.

But interest rates are at the bottom and very likely to start increasing by the next of this year.  A big reason that interest rates are still very low in because the Federal Reserve has done everything they could to keep them low and when they started to increase, the Fed announced earlier in the year that they would buy $300 billion in Treasure Bonds to keep interest rate low. 

Last week the Fed said they will end that program in October.  If they do, interest rates will start there long climb as the Fed will soon have no choice but to raise interest rates to reduce the trillions they have poured into the economy this year.

The Total Cost of Purchasing Is at the Bottom

The total cost of purchasing a home with a loan is a factor of the purchasing prices plug the interest rate.  By next year the increase in interest rates will increase mortgage payments more than the drop in housing prices, which means that the total cost of purchasing a home will be increasing

Unless of course you plan to purchase a home with cash, then you are better off waiting a few years as home prices continue to drop.

The $8000 first time home buyer program is also a limited time offer that will probably not get extended and never be available again.

Maintenance Costs Will Increase

Of course homeownership is not for everyone and even though the total cost to purchase a home is at a record low, the cost to maintain a home will be increasing.

Homes are expensive to maintain and the cost of new materials to repair a home are on the rise because of a major increase in sales tax that most every city across the nation is in the process of increasing.  For example, the increase in cost due to a 1% increase in sales tax on a $200,000 home is $2000.  So, remodeling your bathroom or replacing your carpet will probably cost you an additional $100.

Income taxes are also going to increase as Obama allows the Bush tax cuts to expire. This will result in an increase in the wages of carpenters to cover the additional income taxes that they will have to pay. 

In general, homes are getting older and more run down as the number of new homes has been drastically reduced for three years and probably many more. 

Also, high unemployment has caused many to put off remodeling projects for the last several years and many bankrupt home builders dumped thousands of half finished homes on the market.  All of this means that there are a lot of homes that need repairs. So be careful what you purchase.  

Property Taxes Will Increase

After the Federal stimulus package runs out of money, states will be forced to drastically cut costs which will eventually result in cities raising property taxes to make up the difference.  Property taxes will in increasing despite the continued drop in home prices. And of course the larger the home and more you will pay.

Conclusion

If you are thinking about purchasing a home, this is perhaps your best chance to make the purchase.  If you are a parent of a child that would like to be purchasing a home in the next few years, perhaps now is a good time to help your child make the purchase.

New homes will be in high demand as the cost of maintaining older homes continues to rise, but the cost of new homes will also take a drastic jump in the next few years. So if you want to build a new home, now is perhaps the best time to do that.

Eventually the Fed will create enough inflation to once again increase the prices of homes, but that may take a few more years because of the many factors working against home prices.  When home prices actually bottom, inflation will be running double-digits and wages will be increasing to allow for home prices to increase - meaning that if you adjust for inflation, home prices will not actually be increasing. 

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