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[admin]

I've frequently heard the suspect argument that lower prices do not increase affordability because your monthly mortgage payments will remain the same. Here is a good refutation of that belief using historical data which shows that lower prices did lead to lower mortgage payments in the past:

http://forums.craigslist.org/?act=Q&ID=31357086

Even ignoring the historical precedent, this belief does not hold if prices fall beyond a certain point or you have substantial savings.

- admin

[admin]

I've come up with a few more counterpoints to the assumption that monthly payments will remain the same if prices drop.

Somebody made the excellent point on Craigslist that arguing that monthly payments will remain the same implies that the interest rate is the only thing limiting prices. This won't hold true once the herd mentality swings the other way and people are reluctant to pay as much for housing because they see prices dropping. See http://forums.boston.craigslist.org/?act=Q&ID=31505868

From another viewpoint, arguing monthly payments will remain the same so you might as well buy now implies that the only factor in determining when you should buy is your monthly payment. This is invalid because there are market forces and personal situations which should also be considered. The cost of renting an equivalent place should be a factor. If it is cheaper to rent than to buy (once you factor in the tax benefits of owning as well as equity and your own utility curve), then you would save money by renting either until rents increased or prices decreased. Another factor to consider is income. If the monthly payments are above what you can comfortably afford, you should wait until your income increases enough to afford it or until prices decrease.

Another response on Craigslist also pointed out that you will lose a lot more if you buy now and are forced to sell in a few years compared to if you had waited to buy. In other words, resale value is another good reason that just considering monthly payments is myopic. Furthermore, liquidity will be greatly constrained as well - you will have a harder time selling in a down market than in an up market.

Even if monthly payments do remain the same, it may be worth the wait so that you can purchase in a buyer's market rather than a seller's market. Why risk having to deal with unreasonable demands from sellers such as forgoing an inspection contingency? If you wait for a market slowdown, the terms of sales will swing back toward favoring buyers once again. You will also have a much broader selection of properties to choose from without the high pressure and rush to outflank competing bidders.

These are all valid reasons for discounting the argument that monthly payments will stay the same as prices go down, but the trump card is the historical data (in the original post) which shows that in the past monthly payments fell when prices fell.

- admin

[admin]

Even though it is inadvisable to base a purchasing decision on monthly payments for the reasons outlined above, if you were to do so, now would still be a bad time to buy. Monthly payments as a percentage of income are substantially higher than they have been in the past. The Economist had this to say:

[admin]

A guest posted in another thread a scenario which approximated the effect that interest rate changes would have on buying power. I took the analysis a step further and produced a chart that has relevance to this thread as well. For a mathematical discussion of the sensitivity of price to interest rate changes, see http://www.bostonbubble.com/forums/viewtopic.php?t=41

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