Joe Wilson's Silicon Valley Real Estate Blog

In a post about a week ago entitled "Is This the RightTime to Buy?" I opined that Buyers seem to be more focused on waiting for the absolute bottom of the housing market without considering the negative effects of rising mortgage rates. I mentioned that with current rates for 30 year fixed mortgages at 6.5% an increase of only 1 point (to 7.5%) would completely negate the savings from a 15% drop in home prices. I also posed the question: which is more likely?...a further 15% drop in Silicon Valley home prices or a further 1% increase in interest rates?  Think it can't happen? Take a look at what rates have been doing since the beginning of the year:

Note that 30 year Fixed rate mortgage rates declined steadily through January '08 reaching a low of about 5.5%. If you bought (or refi'd) then, pat yourself on the back. I refi'd then and locked in a nice 5.25% fixed rate and my back is still sore from all the patting! But then look what's been happening since. Rates started rising steadily as investors in long-term bonds started worrying about inflation and began to demand a higher return for the risk of holding the long bonds. In fact, just since January of this year, 30 year rates have risen from 5.5% to a little over 6.5%, a total increase of 18%! Now home prices haven't dropped 18% over the same period even in the worst-hit areas of South San Jose or South County. So for any Buyer who could have bought a home last January, that same home will cost them considerably more in mortgage payment today and likely even more six months from now as inflation fears continue to drive up long term rates.

Does that mean Buyers have missed the boat? Well, the best boat left port back in January when I was encouraging all my Buyer clients to act. But boats leave the dock every day and if you look at the long term perspective, rates are still historically low:

Anyway, here's my point; the best time to buy was probably last January when rates were at a minimum, home prices were near their lows, inventory was plentiful and Sellers were desperate for any offer. But looking at the long view, it's still an excellent time to buy assuming you have good credit and a reasonable down payment. In fact, with the new FHA loan limits just introduced this year, Buyers with good credit can obtain FHA loans with as little as 3%-10% down. What's more, there's still an historically high inventory and Sellers, while not quite as desperate, have learned that the first offer is usually the best and are reluctant to let a prospective Buyer walk away.

So my advice to Buyers who've been procrastinating or waiting for the Mercury News to proclaim the end of the housing bust, get out there and find your perfect home at a great price before rising mortgage rates further diminish your buying power.