There are a lot of generalizations about local real estate – especially in our market.
Many are true: Prices have been averaging an increase of approximately 5% per year since the mid-1970s; houses double in value approximately every 10 years; and interest rates will go up and down. (Remember when they were at 16%?)
There are nuanced phenomena that I have seen lately: Buyers staying on the sidelines because they have heard that “interest rates will go down and my mortgage will be less.” While this may be true, what these buyers forget is that while they are waiting for interest rates to drop, the prices of homes will continue to rise (based on the trend over the past 50 years).
Q: Why shouldn’t I wait for interest rates to go down? They’re higher now than they have been in years (between 5.5% and 7%), and it sounds like they might go down in the next year or two.
A: Just for argument’s sake, suppose interest rates decrease a full point over the next year. While you were waiting for the rates to drop, the price of your house increased 5%. So, yes, you have a lower interest rate, but it is being applied to a higher number. Your total monthly costs will probably be higher. And you’ll need to put more cash down as well.
Q: What if prices go down while I am waiting for interest rates to go down?
A: Then you’d be a double winner. Unfortunately, historically, the chance of price declines is rather low.
Q: What options do I have if I don’t want to pay a high interest rate?
A: There are several options. Remember the adage: “Marry your house, date your mortgage.” Refinancing after a year or two is easy, and the costs are fairly low. Many lenders will reach out to you when your loan might benefit from a refinance. You can also buy down the interest rate; this means you are essentially giving the banks part of their profit upfront in exchange for a lower interest rate for the life of the loan. There are temporary rate reduction programs that will lower your rate for the first year or two.
Q: Who will give me the best rates?
A: I usually suggest that you start with whomever you have a banking/investment relationship with now. Typically, they will give you a better rate because of the relationship and they want to keep your business. Start there and then call around to see if your situation might be better handled by a bank or a mortgage broker. I suggest you be upfront with whomever you talk to – let them know that you are shopping around.
Q: But how will I know what will happen in the market and with interest rates over the next year or two?
A: It is difficult to predict, and no one really knows. When given too many choices, human nature is to say “no.” In this case, saying “no” now might end up costing you more later.
Owen Halliday is a longtime Los Altos resident and realtor who manages the Christie’s-Sereno office in downtown Los Altos. Call him at (650) 492-0062 or email [email protected].
