November 30th, 2008 by Michael Oliver

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Talking with several buyer clients of mine and others in the industry it looks like the word has spread that interest rates took a big drop last week and most buyers are aware of this. Now I don’t want to over blow this BUT our local real estate market here in Tucson has been looking for something to “incentivize” buyers to take action. This so called “demand side incentive” has been lacking for some time, but low interest rates which everyone can agree 5.5% for a 30 year fixed is very low should get a lot of buyers off the fence and into a home sooner rather then later. Demand is the basis of any product or market without it (or a significant lack there-of) the marketplace will falter and as we have seen here in Tucson AZ prices will soon be headed south. During the real estate boom the demand side incentive was that “Hey next month prices will be higher so buy now!” and this for a long time was true. For about 3 years we saw prices escalate every month pretty steady. Now for the past 3 years we have seen prices decline and also interest rates hold between 6.5% and 7% for the majority of this downturn. This left many buyers thinking “Why buy this month when next month I can buy MORE home for the money or the same home for much less?” unless you had a need to purchase a home more then likely waiting has saved you a lot.

I really think as long as the mortgage rates in Tucson (Every area has different rates believe it or not due to a lot of factors.) stay low the raw affordability of a home is going to do a lot more then about anything else over the past 3 years to get the real estate market here stable. Some areas of town are already somewhat stable Sahuarita, and a couple other parts of town I would consider there is more stability there then lets say the high end segment of the Tucson market. (High end meaning $500k+/Specifically the $1M+ market.)

Raw affordability is quite impressive these days think about this right now on the NW side of Tucson there are homes all day long that a buyer can buy (nice homes) for about 175k-200k. These homes a few years ago without exaggerating at all at one point were worth 275k-300k. Now obviously that has nothing to do with home prices now, but it serves as a mark by which to peg how far home prices have come down in the past 36 months. So lets say a 175k 3 bed 2 bath home on the NW currently with a 5.5% mortgage (30 year fixed) rate would equal about $1050-$1100/month payment. If you were to “rent” a 3/2 apartment on the NW side (at a decent place) your rent would easily be in the $950-$1050/mo without a doubt! Now keep in mind with owning you qualify for a decent amount of tax deductions that renting doesn’t offer, AND keep in mind that if you live in your home long enough just by paying down the mortgage you will get a decent amount of equity (especially after 30 years!) this is never an option with renting. One last “point” to be made is that for the most part “rent” will go up in price every year a little bit, so if you bought a place today then 10 years from now the mortgage payment would be the same $1050-$1100/mo while the rent that used to cost $950-$1050/mo is now 10 years later $1300……When you realize this now regardless of equity or anything else owning is just simply cheaper! (When looking at long term time frames.)

What I am trying to get at is obviously buying a home is a big decision, and it’s not for everyone but long term trends, statistics, and historical evidence supports the notion that owning your own real estate is a fundamentally better way to obtain wealth over renting. The issue that keeps people from actually owning is affordability. Now that affordability is at (at least in the past 5-7 years) a high; more people are able to and most likely more willing to buy as affordability gets better here in Tucson boosting the demand side of the market. This added demand should help the Tucson real estate market get back in balance. Even without the interest rate plunge of last week Tucson’s market is trending back towards normal but the low interest rates will get us there much faster. Now the 5.5% 30 year mortgage rates may not be around for a long time, the bond markets determine what mortgage prices run. If we see mortgage rates return to the more 2 year average of 6.5% then this boost of the low rates will be very little. However if we see mortgage rates stay in the mid 5% range or even drop to low 5% range (5.175%, 5.25%, 5.375%) we could even see a greater push of buyers wanting to get in and lock a great rate and buy sooner rather then later. Only time will tell how long the interest rates stay low but I guarantee this is a good thing for markets across the country specifically Tucson where home affordability is already pretty reasonable.

Keep in mind if you’re looking to refinance your existing mortgage or get a loan for a home purchase the two mortgage professionals I have worked extensively with for the past 7 years are: Marissa Thomas with Infinity Funding her phone number is (520) 250-2902 or Eric Painter with Nova Home Loans he can be reached at (520) 419-9457. Both loan officers have extensive knowledge and are very reasonable in the fees and rates they charge to complete a loan.