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Everyone is aware of the challenges the housing market faces on a national level. But for real estate professionals, the challenge is to show buyers the long-term benefits of home ownership and the opportunities that exist in today's local markets.
In volatile times, buyers and sellers may be scared to the sidelines by shifting home prices. In a down market, it's easy to lose sight of the fact that real estate is a long-term investment. Historically speaking, it's one of the best investments you can make.
A good reason to look at buying is interest rates are historically low right now, and they can have a much greater effect on affordability than home prices. For example, suppose you are taking out a $300,000 loan, to buy a home with zero down at 6 percent (Let's also assume an excellent credit score). The principal, or cost of the home is $300,000. The interest, or cost of credit is $347,515 - more than the price of the home, even at a modest 6 percent rate.
Rates have risen in the first half of 2008, but in historical terms, mortgage financing is still a great bargain. From 1980 to today the 30-year fixed rate mortgage has ranged from more than 18 percent to less than 6 percent, says Jim Elfelt, a mortgage banker in Virginia Beach, Virginia. If you're waiting for a home prices to come down another $10,000, Elfelt says, you may be missing the big picture because a small increase in the cost of credit can quickly offset a reduction in a home's sale price.
For example, suppose you're applying for a 30-year, fixed-rate $300,000 mortgage. Note how a small change in rate can makes major difference in your monthly payment and the overall cost of your home through the years:
| Interest rate | Principal | Total Interest paid | Monthly Payment | Total Cost, Principal & Interest | Total Additional Cost |
| 6% | 300,000 | 347,515 | 1,799 | 647,515 | 0 |
| 6.25% | 300,000 | 364,975 | 1,847 | 664,975 | 17,460 |
| 6.50% | 300,000 | 382,633 | 1,896 | 682,633 | 35,118 |
| 6.75% | 300,000 | 400,486 | 1,946 | 700,486 | 52,971 |
| 7% | 300,000 | 418,527 | 1,996 | 718,527 | 71,012 |
As you can see, a single percentage point on your mortgage has a huge effect on a home's affordability. The moral? When you're looking for a bargain, it's easy to focus on sales price, but be sure you're not losing sight of the big picture. If you try to time the market to save a few thousand on the price of a home, you might end up with a higher monthly payment and total overall cost of home ownership.
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