### Buy vs wait, a rough analysis

Over the weekend someone (very close to me ;- ) said something like -

"When you buy a house, you always have a period at the start where you pay mostly interest and not much principle. So you should buy now and get past that point, otherwise you are putting of the 'painful' period of years of 'mostly interest' payments. "

I couldn't think of a good counter argument to this at the time, but thought about it, and came up with the following graphs to explain why I disagree.

This analysis has lots of assumptions, and is meant to illustrate the point, rather than be 100% accurate.

Let's assume someone wants to buy a house. The can afford about $4100 a month mortgage payment. As the graph below shows, if prices are likely to fall, then it is better to wait, then take out a shorter term mortgage, than buying now at bubble prices.

And of course this doesn't take into consideration higher tax, negative equity etc etc.

So let's look at the median prices for an area of San Jose, ca. (just because I have the numbers!) Also this is full of assumptions and guess work, but should highlight the basic point.

If you believe (like I do) that we are in for a correction of about 20% (in real terms) of prices over the next 5 years (equivalent to much more in inflation adjusted terms) that would equate to a picture something like the one below-

"When you buy a house, you always have a period at the start where you pay mostly interest and not much principle. So you should buy now and get past that point, otherwise you are putting of the 'painful' period of years of 'mostly interest' payments. "

I couldn't think of a good counter argument to this at the time, but thought about it, and came up with the following graphs to explain why I disagree.

This analysis has lots of assumptions, and is meant to illustrate the point, rather than be 100% accurate.

Let's assume someone wants to buy a house. The can afford about $4100 a month mortgage payment. As the graph below shows, if prices are likely to fall, then it is better to wait, then take out a shorter term mortgage, than buying now at bubble prices.

And of course this doesn't take into consideration higher tax, negative equity etc etc.

So let's look at the median prices for an area of San Jose, ca. (just because I have the numbers!) Also this is full of assumptions and guess work, but should highlight the basic point.

If you believe (like I do) that we are in for a correction of about 20% (in real terms) of prices over the next 5 years (equivalent to much more in inflation adjusted terms) that would equate to a picture something like the one below-

While this is a rough estimate, it highlights the point that waiting for prices to fall does not mean you will be paying the mortgage for longer (for the same monthly payment).

## 2 Comments:

The two keys are how long you are planning to live there, and how much can you afford each month.

If possible, you would want to buy when rates are high but prices are low -- that goves you the opportunity to refi if/when rates come down.

The alternative question is where will you live while waiting to buy? Some people simply need the space and tax credit and therefore must own something . . .

Thanks for the comment barry, love you site. Yup I agree, I still have to live somewhere.

While waiting for prices to moderate, I can rent a house for about 2000-2200 a month, with no maintainance, prop tax etc etc. (Ok no tax deduction either. But that house would cost me 750k to buy. That's the same house, same neighborhood.

Even with the tax credit, it's still far more expensive to buy vs rent in san jose, ca. So my 4100/month that I could (in the example!) afford minus 2100 to rent a house, still leaves a nice amount of 'equity' building in my bank account, even without the tax credit.

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