RISK VS. REWARD:

What is a buyer to do? The typical potential buyer has sat on the sidelines watching the market slide to levels that are now, in most cases, lower than 2004 and in some cases, levels that have not been seen since the late 90's.  At the same time, interest rates have dropped to levels that may never be seen again. Buyers must decide when the time is right. How is a buyer to decide the perfect time to buy? Well it comes down to risk vs. reward. There are risks and rewards for all the financial decisions we make, especially now.

What kinds of risks are there in buying a home? The biggest risk when purchasing a home is falling value. That is a real risk we have learned all about during the last 3 years. Values have dropped in our area 30 to 70 percent, depending on where the home is located. That begs the question, "what rewards are there in buying a home?"  There are several advantages (rewards) that come to mind. The first one that I think about is the pride and enjoyment of homeownership. You cannot put a dollar value on "living the American Dream".

Financially, homeownership usually provides tax advantages to the home owner (Check with your tax advisor to be sure). The other financial reward is home appreciation. Over time, we as a nation have averaged approximately the same rate of housing appreciation as the rate of inflation. This tells me that owning a home is a great way to hedge against inflation.

What are the risks in not buying a home? There are a several high risks in not buying in times like these: First, not buying a home in times with huge inventory levels reduces the chances of buying what you want. With so many choices, one can be highly selective as opposed to when inventory is low. Another risk is missing the bottom of the market. In some desirable areas, inventory levels are already less than half of what they were 18 months ago. But realistically prices may not escalate too soon.

BIGGEST RISK TODAY:

The most pertinent risk today is related to interest rates. Rates are low, very low. So low in fact, it should be one of the most pressing issues of the buyers' decision making process. I have several examples of how critical the interest rate is when buying a home. Interest rates directly affect the purchasing power of a buyer. Lets' look at some of the differences in purchasing power of two example rates or the current rate of 4.875 % vs. a great rate of 6.50 %: (Principle and interest payments to be compared only.)

• $1000. P&I @ 4.875%, Mortgage Loan amount of $188,900.
• $1000. P&I @ 6.500%, Mortgage Loan amount of $158,211. (Loan difference of $30,689)
• $1500. P&I @ 4.875%, Mortgage Loan amount of $283,442
• $1500. P&I @ 6.500%, Mortgage Loan amount of $237,316. (Loan difference of $46,126) 
• $2200. P&I @ 4.875%, Mortgage Loan amount of $415,750
• $2200. P&I @ 6.500%, Mortgage Loan amount of $348,064. (Loan difference of $67,686)

I will let each of you decide how important this is to you. However, I find that this is a strong argument to purchase today. In my opinion, the risk of prices going down further is nothing compared to the risk of interest rates going up. If you would like to discuss this further or the plans to purchase a home in Arizona, please call me (623-680-2081) or email me jim.kuttner@remax.net anytime.