Guide Me Home to North Jersey

Aside from location, number of bedrooms, and schools, the most important criteria for a buyer is usually the price of the house. Many say right up front in the search process, “I want to spend between X and Y dollars.” Usually, the buyer prefers the more expensive home as it has more features than they are looking for!

But in this market, it’s important to understand that rising interest rates can have a huge effect on the monthly expense of mortgage and taxes. Right now, conventional wisdom says that interest rates will go up after March 31st causing higher monthly payments and the tax credit expiration will end April 30th causing buying activity to slow down. This will result in more inventory on the market. Good old-fashioned supply and demand in play here! Both buyers and sellers must be acutely aware of the cost of the house vs. the price of the house in this time period.

Let’s look at the consequences of an interest rate increase. The general rule of thumb is that for every 1 percentage point interest rate increase, the mortgage costs approximately 10% more. That means the buyer must lower the top price he is able to pay, put more money down, or resign himself to a higher monthly payment (sellers must be willing to lower the price of the home quickly to remain a viable and competitive player in the market). Now let’s look at the consequences of increased inventory. Unless a house is priced sharply and correctly, it will not sell in a glutted marketplace. Buyers have an opportunity to make an educated lower offer, maintain the projected monthly payments they can afford, and buy the house they want (hopefully, sellers will react, with the help of their agent, to meet this problem head on and lower the price of the home).

Posted by:Mary Jane Benedetto

The spring 2010 Real Estate market is upon us. If you are a buyer or seller, you are probably asking whether to buy or sell now or wait. The real question is: how will the price of homes and interest rates be affected by the following combination of circumstances:

• The expiration of the first and repeat home owner’s tax credit (April 30, 2010.)
• The expiration of the Fed program which protected interest rates by purchasing mortgage backed securities (March 30, 2010.)
• The current foreclosures on the market and the rising delinquency rates (3.5 million in January 2010 vs. 2.8 million in January 2009 according to Fox News RealtyTrac report).
• The increased number of bank owned properties coming on the market.

Supply and demand is clearly at play here. Steve Harney, the nationally recognized real estate guru of Keeping Current Matters, recommends in his January 26, 2010 article, to buy now if the Feds let the current tax credit program expire. He also recommends selling now while demand is still high. We saw what happened to the demand in November when the first tax credit expired, pending sales fell by 10%. In addition, Harney says, prices are projected to fall and not regain footing until 1st quarter 2013. As for mortgage rates, 5 of the top economic publications such as HSH & Associates, Moody’s, Washington Post, Barry Habib, and Morgan Stanley all project rates will rise to between 6% and 8%.

Why is all this important? There is a definite relationship between mortgage rates and home prices. Generally, for every point the mortgage rates increase, the value of the house you can buy is reduced 10%. For example, if you wish to take out a $200,000 loan at 5.0%, your monthly mortgage payment will be $1,074. However, if you borrow $200,000 at 6% your monthly mortgage payment will rise to $1,199. To remain at $1,074, the value of the house you can purchase must be reduced to $180,000.

It becomes clear that the time to act is right now. All the positive forces in the market right now (low interest rates and the 1st time and repeat homeowner’s tax credit to highlight the most important), make this a great time to buy or sell. Let’s talk before interest rates dramatically rise reducing your ability to buy or sell the most house for the best price.

Posted by:Mary Jane Benedetto