First off, let's throw out my dissension to the idea that the home you own is an investment. BUT -yes, it's an asset, and yes, it fluctuates in value, so we'll roll with the flow...
Okay, so you are your average American homeowner- check that- Southern California homeowner. You have your primary residence, your castle, your plot on the block, most likely. But do you have acreage? Do you have tenants? Exactly what dividend is this investment paying you? We've learned equity appreciation is no guarantee, and that leveraging that equity while rolling the dice that it will only grow can cause serious pain in a correction.
But prices have fallen, and interest rates have been at an all-time low...shouldn't I get in NOW!?!
Genius marketing. You go, MBA and NAR! As soon as the media waves permeate enough, news about exactly what the definition of a 'Bond Bubble' is, and how it is created will surface, and that marketing campaign is going to come to a screeching halt.
See, the bond market is not too unlike the housing market. There is an asset that is backed by something of tangible value that can be sold to anyone, and there will inherently be an inverse correlation between price, and interest rate with respect to time horizon. And let me tell you, with the tear that the stock market is on, would you take a 4.5% return for 30 years, if you were a deep-pocket investor? Especially, if you were aware of the inverse relationship?
So what happens? Interest rates go up a bit, and the guy selling his house for $750K has a heart-to-heart with his prospective buyer, who tells him that he can't afford the house at the higher payment. They back into a price based on the payment the buyer was ready to make for the old price, but based on a lower interest rate. This means the house sells for $710K, and that's only if rates go from 4.5% to 5.0%.
Who can extract from that? To me, that says that if I'm the guy's neighbor with a similar $750K home, I can expect the value of my house to drop by about $40K per .5% increase in interest rates; assuming there are no foreclosures in the neighborhood creating an arbitrage 'race to the bottom,' and causing further price depression.
Then, the question is, what is your expectation for interest rates? Well, they were just at all-time lows, so I'm thinking that it's not really going out on a limb to assume that they're only going to go up over course of the next 5-10 years. So if I believe that the value of a home is going to go down in the short to mid term, what's the rush to buy?
Wouldn't the best time to buy be when rates were as high as possible, therefore depressing asset (read- housing) prices as low as they could? Because, if the name of the game is 'buy low, sell high,' and I can always refinance my mortgage when rates go down again at some later time in the future, then wouldn't the best time to buy be when the relative affordability was the best?
I'm an early 80's baby, meaning my parents bought their first home when the 30 year Long Bond rate was 14%. Today, the Long Bond yield is 4.41%. My parents bought that house for $90K, and though that house was rather small, it certainly was bigger and had more amenities than the apartment I'm in that I'm sure my landlords paid at least $200K for as a foreclosure. You may say that those purchases were 28 years apart, having an effect on the relative values. Thank you for the bait.
Real estate, as an investment, has less inherent risk than government bonds- not less risk of default, but less risk of a loss of principal. The intrinsic value of land is a beautiful thing. Replacement cost can be insured against, and therefore a return is almost guaranteed...ESPECIALLY if you are the owner and occupier of the investment. So what would a fair return on that investment be? The 30 year Long bond hasn't been much over 5% since it was re-issued in 2006, and though we know that will change, there is more default risk and tangible risk of repayment in the US Treasury than ever before (another topic for another day). So, let's say 2.5% is a fair return for the safest investment around. That would mean that the $90K investment my parents financed 28 years ago would be worth $179,684 today- still less than what my landlords paid for the apartment I'm in. However, I have it on Zillow authority that the house is valued at $384K, today.
Following that thought further, that would mean that a $179K value at a 14% long bond yield vs. what we'll call a $384K value at 4.5% yield today, that would mean that the price of that house should go down by about $21K for every 1% increase to the bond yield.
Bottom line is that when rates go up, values are going down, so how exactly is right now the best time to buy a home? My argument is that the best time to buy the home you are going to live in is when you can afford the payment on the house you want, and make it happen. No need to listen to the hype, because it's all marketing for an industry in desperate need of business. Whether the price is high or low should be irrelevant, but perhaps the best time to buy is when interest rates are high, and refinance later on down the line in order to truly get the biggest bang for your housing buck.
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