Daytona Beach Home Buyers - Remember 1980s Interest Rates?

Yes, I’m a Realtor and would benefit from a market rebound, but I believe it’s more important to put this on the table for consideration than to hold back because it might seem overly promotional.

We have been looking at all the economic indicators, paying close attention to the media, listening to all the economic pundits to make sense of the Daytona Beach Real Estate market. We have decided it’s all off target!

The problem is that the same people and institutions that got us into the mess are now telling us what’s going to happen next. We have decided to take a different approach - the common sense approach. When we do that, we believe that the number one issue we need to consider is not the issue that’s being commonly discussed.

Number 1 Concern for Daytona Beach Real Estate

The number 1 concern for home buyers in Daytona Beach is long-term interest rates. When we apply common sense here’s what we consider:

• The US national deficit is already over $9 trillion
• We are still paying heavily for the war in Iraq
• We are still paying for the war in Afghanistan
• The dollar has declined over against the Euro from $0.84 per euro in March 2006 to just over 0$.64 yesterday.
• Gas prices have risen from $1.43 per gallon in June 2003 to to over $3.22 per gallon today.
• The $150 billion stimulus package will be paid with borrowed money
• Washington is still in denial that the economy is in trouble
• The Federal Reserve has artificially forced short-term interest rates down

We are not concerned in this discussion about why or how we got to where we are. Our concern is how does all this affect buying a house, and the timing of buying a house. What do the factor shown above tell us.

1. The US government is borrowing, borrowing, borrowing
2. The US Central Bank is borrowing in attempts to keep the dollar from getting weaker against international currencies
3. We as a federal government do not budget for financing wars. It is paid with borrowing
4. Gas prices and transportation costs are not part of the Consumer Price Index - inflation is much higher than stated
5. Foreign investors have already discounted the dollar for our inflationary borrowing practices
6. Interest rates are being artificially suppressed

Our common sense conclusion is that interest rates will begin to rise and will push mortgage rates up and up.

So, if you are on the fence about buying a home in Daytona Beach because home values may decline here’s some simple math.

Financed amount = $200,000
Mortgage Payment at 6% interest = $1,199
Mortgage Payment at 7% interest = $1,331
Mortgage Payment at 10% interest = $1,755

Let’s say that you will stay in the home five years and that you buy now for $220,000 and finance $200,000.  The home drops in value 10% and is worth $198,000 at the end of 5 years, unlikely, but let’s go with it. If you borrow now at 6% and interest rates go to 7% next year what’s the affect:

Home drop in value = $22,000
Extra mortgage payment over 5 years at 7% = $7920

This seems to say wait for the price to drop, but what happens when interest rates go to 10% or above as they did in the 80’s when mortgage rates were 15% and more.

Home drops $22,000
Extra mortgage payment over 5 years at 10% = $33,360 WOW!

The question now becomes how much of a gambler are you? We may be wrong. Common sense may not apply, but with markets, sins are always paid for in the end.

Your Decision

My advice is to watch what is happening very carefully. If you have a solid reason for buying a home in the Daytona Beach area now, please consider these points carefully. We can develop a strategy to assure that we are paying at or below market to protect the downside home price risks, while allowing you to protect yourself against rising interest rate risks. Call me at 386-566-7503 to strategize about your options.

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