Fear Keeps Buyers from Jumping on Low Rates

There’s been much made in the news recently about mortgage rates in the United States – both about how they are historically low AND about how, despite the low rates, they don’t seem to be spurring home sales.

The issue of sales volume is a bit misleading. True, sales volume isn’t what you’d think it might be with rates as low as they are. However, the expiration of the tax credits in April inevitably “borrowed” sales from future months. Those who were in the market for a home rushed to get deals done by April 30, so the next couple of months were bound to be down.

However, you’d think that with the low rates, volume would not be as low as it is nationwide. You’d think that low rates would entice more buyers than they apparently have.

Look at the housing market in Canada. When rates were low but set to rise, along with tightening lending standards, people rushed to take advantage of attractive loans before they were gone. In the U.S., that doesn’t appear to be the case.

There are several factors affecting this phenomenon – high unemployment for example – and one of them is the fear caused by the severity of the housing meltdown. What happened when the real estate bubble burst has left people unsure about real estate.

How else can you explain buyers’ hesitancy? During the bubble, people were securing all kinds of exotic loans, many of which have been blamed for the bubble bursting. Creative financing made housing more affordable to some, but only for a while, and when it became unsustainable, the bubble burst.

But now, with the low rates and lower home prices, homes are even more affordable than they were during the peak. And fear of dipping their toe in the real estate water has left home buyers and real estate investors on what they see as dry land.

Fear is a powerful motivator, but it’s often irrational. That is the case, it seems, now. Borrowing money for a home has never been cheaper – well at least not in the last 50 years or so – yet people are not taking advantage the way you might think.

The myth of the “bottom” of the market is one factor. People hear prognosticators say that home prices will drop further, and one subsequent fear they have is that they’ll buy a house only to see it fall in value.

There might be some validity to this; it’s possible that home values WILL drop in some places. But it makes no sense for someone in one market to ignore the buying opportunities in his or her own backyard because of what’s going on in a market 2,000 miles away.

The second issue with the concern of missing the so-called bottom is that it could end up costing you money. If you wait to buy because you think prices could drop further, you could be leaving money on the table simply because rates will eventually rise.

Let’s say, for example, that you buy a $100,000 house that drops another 5 percent in value. You lose $5,000 in equity, right? That’s nothing compared to the finance costs you’d pay by waiting and paying a higher interest rate.

On an $80,000 loan (20 percent down) loan, for example, your total interest paid over a 30-year, fixed-rate mortgage would be about $93,000. Over the same 30 years, the same $80,000 mortgage would cost you about $127,000 in interest at a rate of 6.5 percent, just a point-and-half higher. That’s a difference of $34,000, which makes the $5,000 in potential equity risked a drop in the bucket.

The bottom line is that waiting for the bottom of the market could be costly. If you can qualify for a loan now and are on the fence about buying a home, the low interest rates SHOULD be pushing you off the fence.

For many buyers and investors alike, they don’t appear to be.