Biggest Real Estate Risk: Falling Prices Or Rising Interest Rates?

In the early 2000′s, real estate was sexy and appeared to be without risk.  People talked about flipping houses and purchasing vacation homes as if they were investments with large, guaranteed returns.  It was not uncommon to hear stories about triple-digit returns in just 5 years.  We all know the result of that over-exuberance.

Today, most homeowners/future homeowners look at real estate as what it really is...a good long-term investment and a place to call home.  There is trepidation, once again, as to how long prices will continue to drop and how low they will go before a sustainable recovery occurs.  Will the economy continue its upswing or are we going to see a "double-dip" recession and watch real estate prices plummet? 

Unfortunately, The Cascade Team Real Estate is not a prognosticator and we do not employ a crack staff of economic analysts to guide your decision-making process.  However, as real as lower home prices might be, that might not be your biggest risk is you plan on buying real estate.

Your Biggest Risk In Buying Real Estate Is Higher Interest Rates.
Once again, interest rates hit new all-time lows.  For those of you insomniacs nervous about retirement and your failed financial planning efforts, the impact of these rates is akin to a sleeping pill.  You could buy a home today and pay it off in 15 years when it would have taken you 20 years to pay it off with the same payment just 3 years ago.  The following example is based on a 30-year fixed rate mortgage:

Today’s Interest Rates
Monthly Payment = $1,500 / Interest Rate = 4.5% / Buying Power = $296,000

Interest Rates 3 Years Ago
Monthly Payment = $1,500 / Interest Rate = 6.5% / Buying Power = $237,000

Buying a house is the largest investment most people will ever make.  It is not a decision to be made lightly.  But if you are in the market for a home, you must consider how interest rates will impact your buying power in the future.  We are not suggesting that you should buy more house than you can afford because interest rates are low.  We are suggesting that you evaluate the assumptions in your buying decision (price, down payment, interest rates, term, income level) and perform sensitivity tests to help you determine your correct path. 

At the end of the day, when interest rates go up, your buying power will decrease.  And that may well be your biggest risk.