Yes, prices go down if interest rate goes up. Therefore the monthly cost averages out to be the same. However, the same monthly cost would have a higher percentage going toward interest, which would be tax deductible. Also, property tax, based on sales price, will be less too. Plus there’s always possibility of re-financing in the future if rates drop again. Assuming you do end up with the same monthly payment, waiting for the price to drop, even taking in increased interest rate, is well worth it.

Well, I appreciate the comment. And yes, assuming you get the same monthly payment, you’re right. But as you see above, the monthly cost is not necessarily the same — what I showed for given time periods for average rates and prices is that the monthly cost is $18,738 higher! Sure, it’s tax deductible, but all that means is that your effective income is lowered — you still have to pay the money. One might as well say you want a higher priced home because that will mean you’re paying more interest, too, and that’s tax deductible.

Yes, there’s the possibility of refinancing, but the whole premise of the discussion is that interest rates are rising. So if that’s the case, when are you going to get to refinance? Later on sometime after you’ve paid a huge chunk of mortgage interest (which is mostly what you pay early in the loan anyway).

Sorry, I just don’t believe in market timing, whether it’s the stock market or the real estate market. Either way, it seems to me the smart thing to do is find the undervalued thing (stock, property) you’re trying to buy, and get some built-in equity no matter what the market’s doing. Otherwise we’ll all just wait for interest to be up to 18% so we can hit the nadir on price. Then you can pay origination fees every point or two to refinance for the next ten years while you wait for the interest to hit 6% again.

Right now we’re supposedly in a buyer’s market — I should know, I’m one of the knuckleheads writing about it. Yet just two weeks ago, I took buyers out and found them a house they loved and it was sold out from under us. Surprise, surprise, there was a bargain in the “bad” market, and someone took advantage of it before we could. So we went and found another house that’s priced pretty well already and may offer up to about $19,000 under list on that one. So, you can wait for a price reduction, but the nice thing about real estate values being negotiable and somewhat “opaque” is that you can create your own.

The moral is, what everyone needs is a really smart, hardworking broker like me. Oh sorry, is my salesman showing?

but the price reduction in an overvalued market will lag the increase in interest rate. you mentioned a $6,000 drop over a few months in your example. certainly if you are only aiming for a $6,000 drop in price you should not wait. however, what if that $700,000 home you are eyeing falls by $200,000 over the next 2 years. now is the wait worth it?

Well, you say above that prices lag interest increases, so presumably the wait is not worth it. Unless you want to argue that prices lag in a real world $6,000 decrease, but in your hypothetical $200,000 decrease they won’t? But how’s that going to work?

A few more questions besides what’s the interest rate in your example are:

1) If the money supply is tightening and we’re back into a period of irrational exuberance in the stock market instead of the real estate market, are you sure your employer is going to keep you on, or are they going to have to do some firing to make their shareholders happy?

2) If houses in the future are going to cost less, how much less are you going to get for the one you’re selling for your down payment? And if interest rates are higher and selling is more difficult, does that make it easier for you to make the move you want or harder?

3) If you want a house that’s $200,000 more than you can afford now, when (hypothetically) you can afford that house, are you still going to want it?

No, I don’t believe in market timing. Give it a shot, though, if you want. I’ll still be in business when your $700,000 home drops to $500,000 and interest is up to 12%, so give me a call.

To answer some of your questions

1. I’m in a profession where I will never be laid off, unless people figured out how to prevent death and illness. So I think my employer is going to keep me on, thank you for your concern.

2. I already sold my current home. Renting a property where the owner is bleeding $2000/month right now.

3. The question isn’t that I can’t afford that $700,000 home, the question is that I don’t believe that home is worth $700,000.

And yes, I do plan on giving it a shot, especially when as a nation there’s $1.6 trillion worth of ARM loans ready for reset in 2006 and 2007, and $600 billion of that amount are loans to sub-prime borrowers.

We’ll see if you’ll still be in business when this is all done and over, I’ll give you a call if I can still find you.

Well, it’s nice of you to help the owner out, isn’t it? But remember that while your bragging about him bleeding (ignoring his equity build-up and depreciation allowance) that your investment in his equity gets deducted from the savings you claim you’re getting, along with the interest increase. So maybe I don’t have to bump the interest up to 10% to make it break even with your hypothetical savings. It might only be eight or nine percent, depending on how long you rent.

And whether you can afford it or not, well perhaps I phrased the question inaptly, but at the time I didn’t know how well trained you were. OK, put another way, if you don’t think the home is worth it now, will you think it’s worth it at $500,000 and 12%?

You’ll see if I’ll be in business when interest is up to 12%? To the extent that that might be read as a thinly veiled ad hominem, I suppose I earned it. Sorry about that. And sure, to the extent I spend my time enjoying folks who aren’t buying anything, it may appear to the casual observer that I’m not busy. But he who gets into the short sale and seller financing period with the most content wins.

As for how price decreases lagging behind interest rate increases are supposed to help you, I noticed you skipped that one. A wise strategic choice, that!

sounds like you are advocating the purchase of investment properties with negative cash flow solely for equity gains and depreciation allowance. That may be sound investment in your book, but sorry, I guess I’m just not sophisticated enough to appreciate the benefits of owning negative cash flow properties.

It certainly is interesting you chose to focus on future interest rate of 12% to counter the possibility of a $200,000 price drop. I hope you are not suggesting price drop of that magnitude is only possible with that type of interest rate hike.

And while price decreases do lag behind interest rate increases, the rate of the drop may be accelerated by other factors. While we are on the topic of price drop. It does appear that the price drop over August to now in Sacramento County is $20,000, quite a bit of difference than your example of a $6000 price drop. Suddenly waiting doesn’t seem so bad afterall.

The key to wealth building is buy low and sell high. Sometimes it is just that simple.

Well, in spite of how it “sounds” to you, I’m not advocating being upside down on investment properties, and ideed, I can point out past posts where I argue against that very thing.

What I am saying is that your rent counts as one of the expenses you incur through your “strategy” of waiting for the deus ex machina of some mysterious “other factors” to cause a price drop for you. I’m also pointing out that your gloating over your landlord “bleeding” $2,000 per month needs to be taken in the context of the fact that he’s using other people’s money, along with his (mostly) pre-tax dollars and your (exclusively) post-tax dollars to build his equity, meantime getting favorable tax treatment in other areas. Is it the investment I would have chosen? No, of course not. But does that mean it’s necessarily a bad investment over the long term? I don’t know all the particulars, but maybe not. Unless, of course, you want to argue that those “other factors” are going to operate indefinitely, such that in the long run California property will be worth less? Can you pick any twenty year period in the last sixty years and demostrate that for me? Can you even demonstrate it if I let you throw in the 1930s?

By the way, your numbers for August to now (the last 30 days) are off by about $4,000, but more importantly (and apropos “other factors”) a less than 4% fluctuation between winter and summer is hardly the end of Western Civilization as we know it. Hopefully some OTHER other-factors will accelerate the drop for you. (Actually, I hope they won’t, because my clients and I own houses, so I hope they go up up up!)

As for buying low and selling high, yes, that’s the mantra of market timers, isn’t it, and they couple it with the premise that they can beat the market at it’s own game and do just that. And as I said at the outset, if you can pull it off, you stand to come out ahead. Good luck with it.