Are you delaying a home or investment property purchase because you hope prices will drop?  You’re not alone.  As I wrote in a previous article titled Now is the Time to Invest in Oahu Real Estate, I know many people who sat on the sidelines since 2003, only to watch single family home and condo prices nearly double.  They’re still kicking themselves.

As our economy is weakened by the surge in oil prices that affect nearly every product sold, there is another facet of the property purchase we tend to overlook.  We’ve taken low interest rates for granted.  It’s easy to forget that mortgage rates were above 7% in 2002 and above 8% in 2000.  What if the Federal Reserve raises interest rates to fight the inflation being injected into the economy by rising oil prices?  Let’s compare mortgage payments at different interest rates.  The table below shows principal and interest payments on a $500,000 loan.  A 1% interest rate hike drives your monthly payment 11% higher.

Let’s look at this from another angle.  Let’s analyze the effect of interest rate hikes on your purchasing power.  The table below assumes you can afford a principal and interest payment of $3000.  A 1% interest rate rise reduces your purchasing power nearly 10%.

In conclusion, if you’re waiting for home or condo prices to drop, an interest rate increase could easily offset that price drop.  Ask yourself the following question.  What is more likely in the next year; mortgage interest rates rise by 1% to fight inflation or a 10% drop in home/condo prices?

If you’re getting ready to buy your first home or are selling and trading up, contact Michael Zimmerman for a no obligation consultation.

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