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Thursday, July 1, 2010

Biggest Real Estate Risk: Falling Prices Or Interest Rates Increasing?

In the early 2000′s, real estate wasn’t risky; it was an investment with guaranteed returns, and large returns at that. People were buying homes and just five years later selling for double what they paid. It was a ludicrous business, and everyone was hopped up on the real estate bubble.

Today real estate is a more risky business, in the short term anyways. Long term, real estate is still a great way to invest money. One thing people are worried about the most is where is the bottom of the market? Is it here?
Are we going to see a double dip and watch real estate prices continue to plummet? Possibly, but lower prices isn’t your biggest risk if you plan on buying real estate.

Your Biggest Risk In Buying Real Estate Is Higher Interest Rates.

Interest rates, again, hit all time lows this week. To be honest, these rates are a little ridiculous. You could buy a home today and pay it off in 15 years when it would have taken you 20 years to pay it off with the same payment just 3 years ago. Let me show you what I mean for those of you who are visual people. (30 year mortgage)

Today’s Interest Rates
Monthly Payment = $1,053 Interest Rate = 4.13% Buying Power = $240,000

Interest Rates 3 Years Ago
Monthly Payment = $1,053 Interest Rate = 6.83% Buying Power = $177,900

Do you see what I see? These numbers are incredible. I remember when people were happy to pay interest rates below 7%. I was happy to pay 7% on my loan for the home I own. I thought I was getting a great deal, and I was. But looking at interest rates today, I’m amazed.

As you can see, if you bought a home today, and prices dropped another 20-30 grand, you would still be way ahead. Because, as you know, with interest rates so low and the fed printing money like their getting ready to party like it’s 1999, inflation is looming.

Inflation means higher interest rates. Can you imagine where interest rates are going to be in 3-5 years from now? Are you waiting to buy in 5 years when the market returns? Why? When interest rates go up, you won’t be able to buy what you can now. Your biggest risk isn’t prices going lower, but interest rates going higher.

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