CURE TO THE POST TAX CREDIT BLUES

When the clock struck midnight on April 30th 2010, there must have been a record number of prescription antidepressants issued for many homebuyers that were without contract on a home on that fateful day. Either that or a lot of self medicating going on. A big fat check from Uncle Sam for $8000, out the window! That is a lot of money to lose out on.

However, there is no need to be depressed anymore. How would you like to stick over $9000 in your pocket on average, regardless of whether you are a first time homebuyer or not? With no strings attached? Without any tax payer assistance whatsoever? Keep reading...

The average interest rate on 30 year mortgages has plummetted from 5.21% in April 2010 to 4.56% in July 2010. What does that mean to the cost of homeownership in the Greater Rochester Area? Let's construct a realistic scenario:

1. The average list price in our area for 2010 is $146,274



2. Let's assume a 3.5% down payment scenario for an FHA mortgage. This would equate to a mortgage amount of $141,154.

Now that we have our controls, let's introduce the variable into this scenario... interest rates:

1. At 5.21%, the amount of interest paid on this loan over the first 10 years will be $40,248.53



2. At 4.56%, the amount of interest over this same time period will be $34,883.60

This equates to savings of $5,364.93 over the first 10 years!

Home prices have softened in our area since the expiration of the tax credit. The reason why? Think about it. The program artificially turbo charged the market and exausted the supply of buyers and this is what happened:

1. The average List Price to Sale Price ratio in April 2010 was 96.77%



2. The average List Price to Sale Price ratio in May 2010 was 93.76%

Assuming you bought an average priced home ($146,274), the difference in actual sale price between April and May would be $4403 in this scenario!

The total savings comes to $9767.93 for the average home purchaser. The beautiful aspect of this is that you are not constrained to $8000. Essentially, "the more you spend, the more you save" (I apologize for using the abominable marketing maxim).

How long will interest rates and prices hold this low? I think that real estate prices will stay relatively flat to weak in the near term because of the anemic state of our global economy and the risk of mediocre economic growth that is projected over the next ten years.

In regard to interest rates, I think that this is a different story all together. I do believe that interest rates will stay historically low (below 6%) over the next two to three years because of the not so hot economic outlook. However, the current level of interest rates (~4.5%) has precipitated because of the European fiscal crisis (in Greece, Spain, Portugal, Italy, and Ireland) and has resulted in a torrential influx of global assets into US dollar denominated Treasuries. The bottom line: short term fear has stoked a major drop in interest rates to an unsustainable level. As long as Europe stays in crisis mode, interest rates will remain very low. Look for rates to rise quickly and dramatically once fears start to wane concerning the EU's financial house. I predict them to rise to where they were pre Greece crisis.

ATTENTION FIRST TIME HOME BUYERS! You may call the checks you write out on the first "rent." Your landlord calls it a "mortgage payment." Unlike the rest of the country, there are many homes in the Greater Rochester area that you could buy, and pay less than what you are currently paying in rent! Not sure if you can afford a home? I have plenty of reputable bankers that can qualify you in 20 minutes over the phone! Call or email me for references!