Should I Buy Now With a Lower Interest Rate or Gamble by Waiting for the Market?

Should I Buy Now With a Lower Interest Rate or Gamble by Waiting for the Market?

This morning I was outside on my terrace having breakfast… a grapefruit with cottage cheese in case you are interested… I digress. I start every morning with a half hour conversation with my business manager Steve Levitt. Instead of our normal discussions, this morning I asked him a few questions from an accountant's perspective.

My Market Realization

As I was speaking with him I realized that he could offer some insight that would go beyond my own expertise. With his skills, we could actually crunch the numbers and see if in fact right now is a good time for people to buy homes and what makes the most sense financially.
Should my clients buy today at a potentially higher price, but with historically low interest rates?
Or, should they wait and see if a market correction will soon result in lower prices, but most likely higher interest rates?

Now Is A Great Time to Get Deals

So many people are grappling with questions about the market right now. You probably are aware that (in Southern California at least) now is a great time to pick up some great deals.
However, my job as a real estate agent isn’t to get my clients' great deals. It’s to get them the best possible deal I can find.
So I asked Steve this question:

The Big Question

Is it wiser for my clients to purchase now at a lower interest rate but the higher overall price for a home, or should they wait and purchase a couple of years from now hoping for a lower price for a home, but possibly with a much higher interest rate?

An Analysis Provided Us With an Answer

We ran the numbers based on a 2% increase in interest rates and a home purchase in two years. Using this increase we concluded that based upon a “normal” decrease of 10% in market values it was more beneficial to purchase a property today, assuming that you plan to hold onto it for a number of years!
I believe that we’re not going to have a repeat of the crash of 2008 because there are no indications of that. The real mystery we need to know the answer to is how much interest rates will rise in the next few years.
If we are hovering at mortgage interest rates around 4% right now, within one or two years we could be at 5%, 6%, or even 7%. What is a non-cash buyer going to do when the house that they want to purchase for $5 million is now $4.5 million. However, if he or she is now paying 3% more in interest, they are going to be very sorry that they did not buy now.
Look, nobody has the answer for any of this. However, I ran the numbers in different scenarios that are possible such as a correction, a crash, and I even accounted for small and large rising interest rates. Throughout all of these scenarios, it basically came down to luck. Maybe, someone will get lucky and interest rates will not rise dramatically. Maybe, the market will drop 10% and someone will get lucky because interest rates don’t move. Is that feasible? Sure. Is that probable? Hardly!
I personally believe that there are going to be rising interest rates at a large level and there will be a small decrease in property values. Let’s not forget the 1980s, friends, where there was actually a time when interest rates were north of 12%, and that wasn’t fun for anyone! So learn from history… it’s all possible. Take advantage of what you have now because the chances of seeing rates like this again during any of your lifetimes are slim to none.
Another point to keep in mind is a lot of people with wealth borrow against their own money on margin. So if you can borrow at Libor plus xyz and you can successfully arbitrage your money and (earn more money than what you are paying to borrow it at) then take advantage now because it is not going to last forever. As interest rates rise then this will not be an option for you. If right now you have zero ideas what I am talking about, then this section isn’t something you need to worry about.

Whether or not you take this advice or not isn’t important. What is important is that you are aware of how interest rates will affect your ability to purchase and sell real estate.
I feel that now would be a wise time to look to secure a good deal. If you live in Southern California, especially, now is a great time to buy. I can’t tell you what to do, but I can definitely give you a different perspective.

Should I Buy Now With a Low Rate or Gamble by Waiting for the Market?

Work With Josh

Josh Flagg is one of the world's most successful real estate agents and has helped hundreds of buyers find their dream home in Los Angeles and Beverly Hills, resulting in over $3 Billion of closed real estate transactions.

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