Many would-be homebuyers seem to be standing on the sidelines, watching to see just how far home prices will drop.  According to Standard & Poor’s/Case-Schiller Home Price Index of 20 cities, housing prices for April fell for the 21st consecutive month.  San Diego was one of the cities included in the index and here prices were down 2.6% for the month and 22.4% since April 2007.

 

But falling prices aren’t the only consideration.  Interest rates have been steadily increasing and are at their highest point in the last nine months.  Additionally, in reaction to the thousands of foreclosures sitting on their books and crippling the industry, lenders have tightened their criteria and raised requirements across the board.

 

Have we hit bottom?  This housing market slump is as bad as any since WWII, and according to experts will be longer in turning around.  Nicolas Retsinas of Harvard’s Joint Center for Housing Studies, observed in a report issued on Monday that housing markets “historically recover only after the economy has entered a recession and a combination of falling mortgage interest rates and house prices have improved housing affordability.  It will take longer to rebound given the unusually high levels of foreclosures and constrained credit markets.  The slump in housing markets has not yet run its full course.”

 

So buy now, or wait?  Let’s say you buy a home today at $375,000 and have an 80% mortgage.  A $300,000 mortgage at 6.5% would be $1896.20 per month for the principal and interest payment. Now, what if you waited for a couple of months and the house price dropped to $350,000, but interest rates continued to increase?  The same 80% mortgage would be $280,000 but assuming an interest rate of 7.25% the monthly principal and interest payment would be $1910.09.  So you would owe less in principal, but quite possibly could be paying more on a monthly basis.  $14.00 a month difference isn’t such a big deal, but over the life of loan you would pay $407,637.34 in finance charges on the $280,000 loan, and $382,636.71 on the larger $300,000 loan.  That’s $25,000 more on a smaller loan, but at a higher rate.

 

So the answer to buying now or waiting isn’t easy without a crystal ball.  However, as interest rates continue to rise waiting for the price to fall another $10,000 – $25,000 may not be the best decision after all.