I was talking with a gentleman the other day who commented that he didn’t think he wanted to purchase at this time because he expected real estate values to continue to go down.  That was his opinion, not mine and to be truthful, he said that because he had a net “zero” gain on the sale of his house. Truthfully sad … but I believe it is skewing his thinking.

Anyway .. it got me considering whether his reasoning (e.g., real estate is a bad investment right now) was accurate financially.  I say that because I look at the real estate market right now and think the absolute opposite.

Prices are back to 2007-8 levels and interest rates are so DARN low right now (4.25% was the last quote I got for a 30 Year, fixed, 740 credit score, 80% LTV). In my mind, real estate seems to be an AWESOME investment right now!

There are two issues that need to be considered in looking at real estate as an investment:

First, what can I get for my money right now? Is that more or less than what I am expecting for the future? Most people translate that into monthly payment. If I only have $1000 per month to spend right now, how much can I get for that $1,000 now?  How much will $1,000 per month get me in the future?Second, when the time comes for selling, will I make money or lose money when I get to the closing table?

My assumptions are:

Interest rates or at or near their lows. I am expecting interest rates to rise over time due mostly to the fact that prices generally are rising.  Any one who buys groceries or gas on a regular basis knows that prices are increasing. I believe that we have artificially low rates right now. My assumption is a 2% increase in interest rates during the next 2 years. I don’t know that for sure, of course, but that is my assumption.  Also, as interest rates increase, prices will also increase.  Historically, that is what happens in real estate.

Let’s look at an example:

For a $100,000 home loan, a 2% interest rate increase (from 4.25% to 6.25%) would cause the principal and interest payment to rise from $491.93 to $615.71 per month. That is equivalent to a 25% higher monthly payment meaning that I will have to pay MORE for the same house in the future.

To keep the current monthly payment of $491.93 even though the rates are higher, you would only be able to afford a $80,000  home loan. That is 20% less house. OUCH!

Annually, the outlay from the higher payment would be about $1500.  In 2 years, that would be equivalent to $3,000 more in payments. Thus, if you look at these figures by themselves, it would seem that you would “lose” so to speak with real estate if you are expecting prices to drop by more than 3.00% during that 2 year period … let’s say 5%.  So, if I am expecting the sales price to be $95,000 in two years, I would have lost a net $2,000. Is that right?
My answer is DEFINITELY NO!!! What you must keep in mind, however, is: What could YOU buy in 2 years if you kept your $100,000?

First, just as an aside, you would have not had any ownership in a home. No tax benefits! Just lease payments which are higher than they have been in a long time.

Second, if you still only have $491.93 per month to spend on principal and interest, you would only be able to afford an $80,000 house. Even if you compare that with the $95,000 you THINK you would have sold your house for, that’s an 18% loss. Doesn’t sound like a wise choice financially!  Also, as I stated earlier, historically, home prices usually rise as interest rates rise.  So, what you could afford, probably would be even less than the $80,000.

For those who invested in the last 4 years, there truly has been a big hit! No question there!  What needs to be kept in mind is the reason for that hit … the housing bubble and stupid mortgage practices. You know the old saying … Hindsight is 20/20. It would have been great if we all knew that the bubble was going to pop.

Historically, real estate has been a great investment. Right now, we have this amazing phenomenon of having both low interest rates and low prices. We feel like it is an AWESOME time to invest in real estate and hope that this analysis will get you thinking along the same lines as well.

To find out what is on the market right now, return to the main page and choose your search area.  We’d love to help you invest in the Texas Hill Country.  Our number is 830-995-2511.