Hawaii Real Estate Reporter

Buyer beware of what waiting can cost
You snooze, you lose when interest rates head upward

By Lisa Scontras
Custom Publishing Group

Waiting for the right time to release a summer blockbuster movie makes show-biz sense. Waiting for a bottle of wine to be perfectly aged is almost an art form. But waiting until the price of homes in Hawaii come down? You might just wait forever, says Carl Worthy, training director at Prudential Locations.

“I remember one of my first open houses in Manoa in 1972, the home was listed at $65,000,” says Worthy. “And at that first open house, most of the people who attended told me very emphatically that prices were going to fall and that ‘these high prices cannot possibly hold.’ I wonder how many of them missed out altogether?”

Worthy’s 35-plus years of experience in the real estate business says that “waiting is the human default position taken when we’re confused or not sure of what we’re doing.”

“I hear things like,’My hairdresser says prices are falling so we better wait,”‘ he says. “But waiting can be very expensive.”

Worthy says there is a misconception that home prices are falling in Hawaii. In fact, while there have been slightly fewer sales, the average price for single-family homes on Oahu is up 2.4 percent through May 2008, and the median price of condos is rising as well — setting an all-time record high in May of $337,300. Prices are actually up.

With interest rates on the rise, he adds, waiting is going to actually cost you.

“Interest rates will be heading up very soon,” says Worthy. “Count on it.”

Rates have been at their historic lows for several years now. Consumers have almost become complacent — in a form of denial not believing that low rates are poised to change anytime soon. The Federal Reserve has kept rates low to date to stimulate a sluggish economy and earlier this year to bring some liquidity to the financial markets to offset the destructive subprime nightmare. But now, according to Worthy, there are bigger problems.

The U.S. dollar is weakened by the repeated lowering of rates. Inflation is high because of the weakening dollar. In the minds of the Feds, the one thing worse than a weak economy and market liquidity is escalating oil prices and inflation.

“The Fed has one response to inflation, and that’s higher interest rates,” say Worthy. “Today’s low interest rates are headed for extinction — quickly. And they are not likely to return anytime soon.”

Once rates start rising, even if the price of a home does go down, buyers will pay more. Remember when rates began falling from 8 percent in early 2000 to 7 percent about a year later, 6 percent in mid-2001 and then dipped under 6 percent in 2003? Buyers realized that as rates fell, their buying power increased. And the inverse is also true.

When interest rates go up, the amount a buyer can borrow for a home goes down.

“If home prices were to drop by 10 percent and interest rates increased by 1 point, the buyer’s monthly payment would actually be higher for the same home,” says Worthy. “If rates go up, the loan amount goes down — in direct proportion. That means the price a buyer can pay for a home goes down — a lot.”

For example, on a $600,000 home, he says if interest rates go up just one point, the buyer loses $60,000 in buying power. That means the same buyer is now only qualified to purchase a home for $540,000.

Interest rates ultimately have a much bigger impact on cost than the purchase price does.

Worthy adds, you’ll feel the effect of the purchase price of the home only once … you’ll feel the effect of the interest rate you pay every month, when you make your mortgage payment.

“So the question you should ask is, what is more likely to happen: a 10 percent fall in home prices or a 1 percent rise in interest rates?” he says. “Truthfully. I have been selling real estate since 1972 and I can’t recall anyone ever telling me that they were sorry they went ahead and bought something. However, I have had hundreds tell me their horror stories when they waited.”