As I wrote last year, the first time home buyer tax credit would simply force all the demand to occur during the tax credit period leaving a dead zone in its aftermath and I have once again been proven correct.
The thing that most troubles me is that normally, low interest rates tend to cause a house purchase boom as we saw back in 2001-2004. Of course this is the worse time to buy a house because house prices will rise sharply as financining, affordability and demand increase due to lower monthly payments.
When interest rates rise, most people avoid buying houses because affordability decreases due to a higher interest rate and higher monthly interest payment. It simply cost more money in financing to buy the same home. This normally causes house prices to drop so that affordability remains the same for buyers.
experts say, even though this is contrary to what most people do, to buy a house when interest rates are high and house prices are low. because you can refinance the house at a lower rate down the road while enjoying your lower principal payment.
They say to not buy in a low interest, high home price enviroment (circa 2005) because that is simply a bad financial choice even though that is when the house boom mania and quickly rising house prices entices everyone to get in on the action.
Now we have a situation with low interest rates, low house prices. Perfect time to buy?...........Right?......right?
What happens when interest rates start rising?
historically this would mean house prices have to drop even further in order for affordability to stay constant.
Ex. A $100,000 mortgage at 4.5% cost you $507 dollars a month. If interest rates rise to 6.5% the same $100,000 mortgage costs you $632 a month.
If someone can only afford a 507 a month payment then the house price must drop to $80,000 for affordability to remain the same.
The question is....is now the best time to buy houses due to low interest rates and house prices....OR....is it the worse time to buy because an inevitable rise in interest rates will cause house prices to drop even further.
I really don't know.