THE POTENTIAL HUGE RISKS IN WAITING TO BUY RAPID CITY AND BLACK HILLS REAL ESTATE

Mortgage interest rates are at an all time low. You can buy $50,000 more home today than the median priced home two years ago, but with no higher payments. That’s right, a median priced Rapid City home two years ago went for roughly $175,000. Today you could buy one priced $225,000, and still have the same payments as if you bought the lower price at higher interest rates just two years ago. The affect of the interest rate decline dwarfs the wildly popular, but comparably meager $8,000 Federal tax credit incentives of earlier this year. The market is behaving somewhat blindly to the fact that the “Interest Rate Incentive” is more than SIX TIMES the “Tax Credit Incentive”!

Yet some home buyers we meet are playing “Russian Roulette” in delaying their home purchase. Yes, the future is scary. It’s human nature that many of us fear a little “risk of the unknown” far more than loss of an assured larger gain. We know from the psychologists that such emotion-driven behavior is common.

Let’s consider a concrete illustration, just for clarity.

Assume for the moment that interest rates will go back up in the same way they came down. This is a reasonable presumption, given that Lawrence Yun, Chief Economist of the National Association of Realtors,” recently stated: ““Mortgage interest rates … are expected to gradually rise to an average 4.9 percent next year, then rise to 5.8 percent in 2012. So, since October rates were 4.95% this time last year compared to 4.03% this week, then your monthly payment on a $175,000 (median price) houses last year would have been $96/month more than now. That is an 11% higher payment above today’s principal and interest of $838.51 (see the Oct-2011 figure of 11% in the chart above). So, if rates go up as much next year, as they went down last year, then your payments next year for the same house this year, will be 11% higher. And if rates go up as much in the next two years as they went down in the last two years, then your payments will be 28% higher for the same house in two years.

Of course, if home prices on the same homes decline 11% next year, and 28% in two years, then the price declines would just offset the interest rise. But how likely is it thatRapid City, the third strongest housing market in the entire country, will see home prices decline 28% in the next two years? Zilch. Zero. Nada. No way. How do I know that? Here’s how. At the peak of Rapid City real estate sales during the national housing bubble, our average sold-price for residential housing was $178,821. Since then, during all the national blood-letting,our local average sold-price has declined only 1.3% to $176,527. That’s just peanuts.

From that, I conclude that home buyers who aresitting on their wallets, waiting for the Great Pumpkin to drive Rapid City home prices down 20 times faster in the next two years than we saw in the past two years, may get a taste of how Linus feels each Thanksgiving. Put another way, I sure feel it is a safe bet that interest rates will increase more in the next two years than local home prices will decrease, (i.e., I believe the interest rate penalty for waiting could far overshadow any plausible reward for waiting on price-declines.).

Even worse. What if this waiting game results inus buying our dream home next yearafter interest rates have gone back up to year-ago levels and local home priceshave gone up 5%. That could result in finding our outstanding dream home out standing in a field of dreams.

If you have questions about any of this information give me a call. And if you just enjoy watching an old computing engineer diving in the data dumpster, send me your detailed market question. And if you are one of the many very kind real estate agents who have offered your many compliments and gratitude for sharing this, then please continue to mention Lee Alley Real Estate as the source, as you provide these market analyses to your clients and customers.

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