Profile picture for othersider2

Is the home buyer credit really helping the buyer?

I have been looking for a home to buy in the Leesburg, VA area.  It seems that prices have gone up some because everybody wants to get in on the home buyer credit, and there is more demand now than there is supply.  So I have to ask:  if prices are going up, am I really benefiting at all from the buyer credit?  I don't think its helping me.  I feel like its a trick the government is playing on us buyers to get us all excited and then buy only to find out that we paid more than we should have, even with the credit.  I'm tempted to wait until the program is over to see if prices will come down some.  Any advice?

  • February 24 2010 - Leesburg
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Answers (42)

Othersider2,

You have made a valid point - you are also right in thinking the tax credits do artificially increase home prices as buyers compete for a limited inventory of homes.
  • February 24 2010
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Profile picture for jamulhern
As a counterpoint, prices dropped so far that the values were being artificially deflated because no one wanted to get into the market due to fear.  To stall this, the credit went into place to level it off, so the answer is yes the credit is designed to prop prices up.  You also have to look at the fact that prices fell below the replacement cost in our area so the good deals all took place before the credit when no one was buying.  The credit has spiked demand, and you never get the best price when demand is high.  It is also the same argument about interest rates...if they go up but prices level off or go down, are you better having paid a higher amount but locked in at a lower interest rate?  Interest money is lost forever so some argue that you are better off paying more for the lower interest rate.  There are many talking heads that say interest rates are going to jump by the end of the year so unless you are paying cash, you may be putting out the same monthly expense even at the lower price.  Either way, don't buy anything unless it is exactly what you want.  It's a home first, investment second.  The investment viewpoint is what got us into this mess in the first place.
  • February 25 2010
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Profile picture for jamulhern
Also - have you searched for any topics on appraisals?  We have had homes sell for the same amount as the home next door and then the appraisal comes in 20k lower...it is hard to overpay with the appraisers today - but don't rely on them as a bail out on a contract.
  • February 25 2010
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Profile picture for mrfnuts
It is also the same argument about interest rates...if they go up but prices level off or go down, are you better having paid a higher amount but locked in at a lower interest rate?  Interest money is lost forever so some argue that you are better off paying more for the lower interest rate.  There are many talking heads that say interest rates are going to jump by the end of the year so unless you are paying cash, you may be putting out the same monthly expense even at the lower price.


Not another agent trying to tell us that it's better to take advantage of these historically low interest rates, despite buying at higher prices...

Just to keep the reply short.  One can always refinance into a lower interest rate when it becomes available.  I have never in my life heard of one being able to renegotiate their purchase price after the fact.

And need I make the argument that if you decide to start kicking in a little more principal payment alongside each mortgage check, you'll notice that that mortgage gets paid off a lot faster when the principal is well... lower...

So, please give me the lower purchase price alongside those dastardly evil high interest rates...

  • February 25 2010
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>>>So, please give me the lower purchase price alongside those dastardly evil high interest rates...<<<

mrfnuts,

Believe it or not, the low interest rates do matter for most non-cash buyers.

Do Jimmy Carter years ring the bell?
  • February 25 2010
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Profile picture for mrfnuts
Believe it or not, the low interest rates do matter for most non-cash buyers.

Well, the assertion was already made that 'you may be putting out the same monthly expense even at the lower price'

Thus I was merely stating that given the above, to then conclude that 'you are better off paying more for the lower interest rate' is the most ridiculous bone headed advice to give, yet this same nonsense is repeated over and over again by those in certain industries.

Believe me, if you pay more for an underlying asset just to get a lower interest rate on the financing of it, and all you've accomplished is the same monthly payment, you will NOT come out ahead.  I really should not have needed to take this much time to (re)explain this concept.

Do Jimmy Carter years ring the bell?

I would welcome the return of the interest rates of that era, my savings would actually produce an income stream.  Most folks on a fixed income would also welcome that, in contrast to the artificially low interest rates of today which is royal screwing them.
  • February 25 2010
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>>>I would welcome the return of the interest rates of that era, my savings would actually produce an income stream.<<<

mrfnuts,

Could you stop thinking only about yourself at least for one short minute?

We are discussing here the effect of high interest rates on home buyers.
HIGH interest rates make NO difference only for those buyers who can afford to purchase a home with CASH.

For most homeowners who finance a home purchase by taking a mortgage, unfortunately, high interest rates increase the TOTAL COST of the house - it does not matter how little they pay for the house itself if, at the end of  process, the high cost of financing quadruples the TOTAL COST of the house.

But I should NOT have to re-explain that, should I?
 
  • February 25 2010
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Profile picture for othersider2
But Vivian, isn't mrfnuts right in saying that while the purchase price of the home is fixed forever, interest rates can be refinanced if/when they come down?  From that perspective, it does seem to make sense to weigh the purchase price more heavily in making the decision.  In retrospect, with every home I have purchased through the years, I wish I had not worried so much about the rate, because I refinanced every single one of those homes, some of them multiple times!
  • February 26 2010
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Profile picture for othersider2
Back to the question I orginally asked, when the home buyer credit expires in April, do you think that prices will decrease?  Or will the home buyer credit program have succeeded in jump-starting the housing market and get prices moving steadily upwards?
  • February 26 2010
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Profile picture for sunnyview
As long as employment is an issue, the pool of excited buyers is bound to be smaller after the credit expires. 

How much it will drop, depends on the foreclosure mix, employment and historical prices your local market. Prices would have to drop about 5% on a 150K home to equal out the amount of the buyers credit. 
  • February 26 2010
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"while the purchase price of the home is fixed forever, interest rates can be refinanced if/when they come down", If and only if the interest rate goes down in the future, which is unlikely, Freddie Mac projects 5.4% for 2010 and 5.8% for 2011.
http://www.freddiemac.com/news/finance/docs/Feb_2010_public_outlook.pdf
There are some arguments that when the interest rate goes up, the home prices will go down, which in not necessary, simple, the buyers buy the cheaper houses and the home values may stay as same as before, (6.5% interest rate in 1999, 7.5% in 2001, the home prices are still go up 10% in California 1999-2001)
However there is guarantee if you do not sign the purchase contract before May 1st, you will not eligibility for $8,000 tax credit, and $3,000 closing cost for the refinancing if the interest rate goes down in the future, (again) which is unlikely, the economy will improve in next few years, therefore the government will not do another intervention as they do now, which is not because they want to bring up the home prices but economy (jobs).
  • February 26 2010
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>>>while the purchase price of the home is fixed forever, interest rates can be refinanced if/when they come down?<<<

IF/WHEN the interest rates decrease....

....and the home values do NOT continue to decrease.
Or IF the home values do decrease, but you have enough equity to be able to refinance.... 

Why do you think we have so many foreclosures right now? Most foreclosed homeowners were NOT able to refinance.
 
  • February 26 2010
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Profile picture for othersider2
On a related note....

January home sales fall 7.2%, median price unchanged
http://usat.me?37680718
  • February 26 2010
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Snow could be one of the reasons - if not the biggest reason.
  • February 27 2010
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Profile picture for jamulhern
Since my professionalism is now being attacked by an angry mob member let me clarify one thing - I never said that you were better off buying at a higher price over higher interest rates - I compared higher prices to higher interest rates as a monthly expense ratio when determining if the home buyer has found the home they have been waiting for. 

News flash to some of you - our market in DC has counties setting all time sales records.  The word "Historic Lows" means just that - interest rates are at the lowest they have ever been.  To back my point up, what were all the car companies doing with the 0% interest rate?  If you did not take that rate, they took $4k off the price...why did they do that?  Because they would be making more money off you taking the rebate and financing the car than having you pay more at 0% interest.  The advice of "Just refinance" - that was what all the lenders were telling people in adjustable rate products and then the rates went higher and they could not afford the home thus causing the foreclosure crisis.  I disagree with that theory because I believe that interest rates are going to climb quickly and settle around 7% for the next 5-10 years.  With all the Govt restrictions on banks and their fees, they are going to make that profit loss up in other ways, mainly by charging higher interest rates.

Like it or not, people will continue to buy and sell homes.  We can have a discussion without insults or attacks on myself or other individuals.  You can agree or disagree, but you do not have to insult me.  Please remember when posting that this individual asked a question in our market, which has low unemployment and low inventory - do not generalize when making your well informed opinions known.
  • February 27 2010
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Profile picture for jamulhern
Sorry that I got off topic - othersider2 - to answer your question originally i think that the tax credit has given the housing market an artificial bottom.  I think that in our area (Loudoun, Fairfax, and Prince William) benefits from a strong job market and has seen a majority of it's foreclosure crisis already taken place.  That is not to say that there will not be any more since there is no real number on the shady loans that were given, but the local economists have suggested that the tidal wave has subsided.  Short Sales will be fad for the foreseeable future, but banks have already made it be known that they will not accept a contract that is not within 10% of market value so the 60-70% deals a foreclosure had brought in the past is not a reality with those.  Just like the cash for clunkers, I think you will see a decline in home sales after the rebate stops, just like I think you will see a decline in the quality of homes on the market - which was the point of my first post.  Smart sellers are taking advantage of this right now, and those in good equity positions with homes you would want to live in are selling right now.  The advantages of the market now, if you have found the home you want, is the credit and the interest rates.  I say that only to back this point up - a $300,000 home bought today would have to drop $60k in price to match the same monthly payment if interest rates rose 2%.  Lost in some other peoples points are the assumptions that your home would never rise in value again, and that interest rates will always drop to this level or lower.  Adding principle to payments is a great way of hedging against any drop in value, because with the lower interest rates it means that more principle is being applied, thus lowering the total amount of interest paid and being applied to your balance.

It is not an easy market to be buying in, which is why it is key to find a home you want and not something that you want to settle for.  Remember, you must live in the home for three years to avoid any penalty for the credit.  I have advised a cash buyer to sit out the market until the credit passes because they do not qualify for it, and the interest rates do not affect them.  Sorry for the long answer, but what good is a one line answer without any justification of what was said.
  • February 27 2010
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Profile picture for sunnyview
I appreciate your opinion and explanation. 
  • March 01 2010
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Profile picture for mrfnuts
>>>I would welcome the return of the interest rates of that era, my savings would actually produce an income stream.<<<

mrfnuts,

Could you stop thinking only about yourself at least for one short minute?


Vivian!  Lol... never in my life have I ever seen such a blatant attempt at out-of-context quoting.  Why not quote the following sentence:

Most folks on a fixed income would also welcome that, in contrast to the artificially low interest rates of today which is royal screwing them.

Ok, rhetorical question, as it's obvious that the answer is because had you quoted me in context your little 'zinger' up there would not had made much sense.

Believe it or not Vivian, there are still people out there who saved money during their life, and are trying to fiance a retirement based on savings.  When they see that their income has been cut to 1/5th the level it was 10 years ago, I do insist they have been royal screwed by these low interest rates.  Couple that with the fact that the CPI numbers are grossly understated, and I assure you the 'golden' years for many have changed to 'lead'.

And while we're on the subject of  'Could you stop thinking only about yourself at least for one short minute? '  It seems to me that advocate an artificially low interest rate on society, where there is clearly a winners and losers (I've mentioned a few of the losers) seems to be very self serving for some one from an industry who's commission check is directly related to the gross sale price of an asset that tends to price much higher when interest rates are low.

Pot, meet kettle.

For most homeowners who finance a home purchase by taking a mortgage, unfortunately, high interest rates increase the TOTAL COST of the house - it does not matter how little they pay for the house itself if, at the end of  process, the high cost of financing quadruples the TOTAL COST of the house.

But I should NOT have to re-explain that, should I?


The parameters of this equation were already stated:  Same monthly payment, same amortization time, only 2 variables, interest rate and sales price.  Your logic doesn't hold.  So, please try to explain it again.

Let me give you a little example. 

Two homeowners:  A and B

Both pay $2000 a month
Both have a 30 year fixed rate mortgage
A has an interest rate of 5%
B has an interest rate of 8%

You have enough information to figure out purchase prices, without getting into the gritty details:

'A' paid $ 373K for the house and 'B' paid $273K for the house.

I do agree that it both leave their loan unchanged, and go the full 30 years that both will end up paying $720K for their respective houses, however, are you willing to argue that A is in the better financial position for that entire 30 years because they have a lower interest rate?  I certainly wouldn't. 


  • March 01 2010
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>>>'A' paid $ 373K for the house and 'B' paid $273K for the house.<<<

mrfnuts,

You are making it more complicated than it is necessary.

Let me make it simple for you: all else being equal, a home buyer financing at 5% will be able to purchase MORE home than a buyer financing at 8%. Or at least purchase the same house at a LOWER interest expense. 

...unless you were trying to suggest that homes currently costing $373K should drop in value to $273K ..... and then even if interest rates increase to 8% .... the monthly payment should stay about the same....

The bottom line is that home buyer would still be purchasing the same house in both scenarios: $373K house at 5% or $273K at 8% - however, with LESS EQUITY for the homeowner in the second case.

Your example of the monthly payment of $2,000 means nothing - what really matters is what quality house that $2,000 purchases.

 
 
  • March 01 2010
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Profile picture for CubsfaninWA
Wanna ask about refiancing "to a lower interest rate" to the people that bought a home in 2007?
  • March 01 2010
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I do not believe that prices are up.  There are more buyers in the market, but not substantially more!  It is so hard to get a mortgage these days and the credit does not help in that department.  You must be prudent and make sure that get a good deal and that the money is worth it for you to move now.  You can certainly sit on the sidelines and let it ride and see what happens!  Best
  • March 01 2010
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.
  • March 01 2010
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Profile picture for mrfnuts
Vivianne:

Why do you keep on changing the subject.  You were the one who replied to my comment on Jimmy's logic:

It is also the same argument about interest rates...if they go up but prices level off or go down, are you better having paid a higher amount but locked in at a lower interest rate?  Interest money is lost forever so some argue that you are better off paying more for the lower interest rate.  There are many talking heads that say interest rates are going to jump by the end of the year so unless you are paying cash,you may be putting out the same monthly expense even at the lower price.

Where it was stated that you may be paying the same monthly expense at the lower price. I was addressing nothing other than that statement, I clearly stated that if as was presented you end up with the same monthly payment, then please give me the financing scenario where you have the higher interest rate but lower purchase price.  You keep wanting to pipe in with 'new information' and it's not even your original statement.  Talk about wanting to complicate things...

One last thing...since you decided to bring it up:

'The bottom line is that home buyer would still be purchasing the same house in both scenarios: $373K house at 5% or $273K at 8% - however, with LESS EQUITY for the homeowner in the second case.'

How is it that homeowner B has less equity?  What new assumptions have you made?  I just want to know by what process you came to that conclusion with the given information.
  • March 01 2010
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>>>How is it that homeowner B has less equity?  What new assumptions have you made?  I just want to know by what process you came to that conclusion with the given information. <<<

mrfnuts,

If both A and B pay the same monthly mortgage payment of $2,000 while A pays only 5% and B pays 8%.... it only follows that B pays MORE in interest expense and by default must have LESS house - assuming the same market conditions. 

Unless B was extremely lucky to find a great house at a low price and was able to purchase as much house as A, otherwise the 8% rate is eating into his house. At the end of the day, B will have LESS EQUITY.
   
  • March 01 2010
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I would like to echo sunny and say that unless employment rebounds in short order, then it is unlikey that prices will rise. I would *guess* the best time to purchase in most areas will be right around when regional employment numbers start to consistently rise. Most lenders will require a good 2 years of work history for a loan.

Of course, there are a myriad of exceptions to this guess.
  • March 01 2010
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  • March 01 2010
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Profile picture for mrfnuts
Vivianne:

If both A and B pay the same monthly mortgage payment of $2,000 while A pays only 5% and B pays 8%.... it only follows that B pays MORE in interest expense and by default must have LESS house - assuming the same market conditions. 

Unless B was extremely lucky to find a great house at a low price and was able to purchase as much house as A, otherwise the 8% rate is eating into his house. At the end of the day, B will have LESS EQUITY.

Your 'Unless' statement is the exact condition stated.  2 scenarios: Same house, same monthly payment, different interest rates.  Why you have to keep shifting the parameters of the original debate (for which you decided to jump in head first) to fit your 'buy now at low interest rate arguments' ?  How else were you interpreting Jimmy's statement (not mine):

'interest money is lost forever so some argue that you are better off paying more for the lower interest rate.  There are many talking heads that say interest rates are going to jump by the end of the year so unless you are paying cash, you may be putting out the same monthly expense even at the lower price. '

Sounds to me like we're talking about whether to buy the SAME house either now at a higher price with a lower interest rate, or a short time later at a lower price but higher interest rate, with the constraint to the problem that both will have the same monthly payment.  I showed why I'd rather finance at the higher interest rate so I could have the lower purchase price (and less to finance), considering monthly payment to be the same in both scenarios.  This is why I said the answer is simple and I shouldn't need to keep explaining this over and over again.  However, it seems you just want to show why my answer is wrong but, by adding new parameters to the original statement after the fact.  I am not sure if you're just trying be clever and win a debate by changing the parameters or you are simply lacking the comprehensive ability to analyze the question asked properly. 

Changing the scenario does not make the answer I gave to the original scenario incorrect.  Just merely shows that a different scenario will have a different solution.  When you're ready to actually debate the original scenario, I'd be curious to see if your answer really differs from mine.
  • March 01 2010
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>>>I'd rather finance at the higher interest rate so I could have the lower purchase price (and less to finance), considering monthly payment to be the same in both scenarios.<<<

mrfnuts,

This is true only if there is a positive equity in the house and the interest rate is much lower than the original interest rate to make re-financing a worthwhile option - it costs to refinance.  

>>>(for which you decided to jump in head first) to fit your 'buy now at low interest rate arguments' ?<<<

Please refer to the very first answer on this thread - purchasing now or later is a personal decision and must be made by each buyer individually.

  • March 01 2010
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Profile picture for dacolan
I like to keep it simple. As long time Zillow member Roberto Ribas, a.k.a. AZRob (REA and 15-year math professor), once put it:

If higher rates were caused by an increasing economy leading to inflation... higher rates wouldn't cause home prices to drop. BUT higher rates in an economy with stagnant wages and job losses, and you can bet it will contribute to prices dropping. -AZRob

Unless incomes increase proportionally to interest rates there is little doubt higher rates will put further downward pressure on prices.
  • March 02 2010
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Profile picture for dacolan
As for the original poster's initial question in this thread, I think you've summed up the dilemma succinctly in that opening post, othersider2.

When was the last time we've seen a recovery in housing before a recovery in employment and the overall economy?

Here's another quote I thought nailed it:
"I don't see anything being gained by holding housing prices higher than the market rate," says Dean Baker, economist and co-director of the liberal Center for Economic & Policy Research in Washington. "It is difficult to see why the government would want to pursue policies that would encourage people to pay too much for homes."

In a couple of months we'll see the policies for both the first-time buyer bribe and artificially low interest rates disappear. This will coincide with the can kicking, colossal failure of a program HAMP trials defaulting, along with the Option ARM peak resets approaching.

Without a significant turnaround in the overall economy and employment, there is little question this will all conspire to have a dramatic impact on the housing market.
  • March 02 2010
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