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It’s no secret the U.S. has been in a real estate tailspin since June 2006. More than one-fourth (27 percent) of single-family homeowners are now in negative equity, which means their homes are worth less than what they owe on them. As a result of dropping home values, we are all caught in a sort of real estate limbo: homeowners are waiting on the sidelines to sell and home buyers are trying to time the bottom, waiting for the ultimate rock-bottom bargain. All of this leads many to wonder:  “when will the bottom happen?” When will this frozen real estate landscape begin to thaw?

What many people don’t consider is that home prices are only one factor in how much a home will actually cost per month. The other major factor to take into consideration is mortgage rates. And, guess what? Mortgage rates are rising. So, if you’re timing the market for home prices to hit rock bottom, you’d better pay attention to that other part of the puzzle: mortgage rates. In fact, if you’re a buyer trying to time the bottom, you could end up with bigger monthly payments the longer you wait. Here’s why:

Case Study: 100 Main Street

To illustrate why timing the bottom is risky, Zillow’s research arm recently analyzed the relationship between mortgage rates and home value declines and how they impact your monthly mortgage payment. With that analysis serving as our inspiration, we applied it to a fictional home we’ll call 100 Main St. and found that even as the home’s value depreciated over time, the actual monthly mortgage payment increased due to rising interest rates.

We assumed that 100 Main St. was worth $300,000 at the beginning of the analysis and we calculated its depreciation based on the U.S. Zillow Home Value Index, which measures the median value of all homes. We used historic mortgage rates from Zillow Mortgage Marketplace. For future projections, we used Zillow Chief Economist Stan Humphries’ forecast that national home values would fall another 5-7%, and Freddie Mac’s forecast that 30-year fixed mortgage rates would reach 5.7% by 2012.

Purchased Nov. 1, 2010 vs. Jan. 1, 2011: $63 More Per Month

If 100 Main St. was worth $300,000 on Nov. 1, 2010, and was purchased at a 30-year fixed rate of 4.1% with a 20% down payment, it would have cost a buyer $1,159 a month. But if the buyer had waited even a couple of months for home values to fall further, they would have ended up with a mortgage payment of $1,222 a month, or $63 more. Despite the 1.8% hit to the home’s value, the mortgage rate increase to 4.7% would have counteracted that. (See graphic below)

Purchased in 2012: $126 More Per Month

What if you wait even longer for home values to decrease?  Based on Freddie Mac’s forecast that mortgage rates will reach 5.7% by Q1 2012 and Zillow’s projection that home values will fall another 5-7% this year (we used 6% for our analysis), you will still end up paying more for a house. Although the home will be worth $23,000 less than it was in November 2010, the higher mortgage rates will leave the buyer with a monthly payment of $1,285, which is $126 more per month than if 100 Main St. was purchased 14 months prior.

We’ve always advised consumers against trying to time the market bottom and even economists don’t agree when it will happen. What’s most important for consumers is to control what they can: their finances and their knowledge base. Take the time to figure out your financial situation and use mortgage calculators that will help you estimate how much home you can afford. Since mortgage rates change on a daily basis and can vary from lender to lender, make sure to shop around on sites like Zillow Mortgage Marketplace to find highly competitive mortgage rates. When you do purchase your next home, make sure it is a place you can see yourself living and affording for the next five to seven years. And remember, even if mortgage rates do climb to 5.7 percent, they are still historically low and home prices in many areas are as affordable as ever.

About the Author

Alison writes about rental and mortgage market trends for Zillow Blog.

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