Which House Is the Better Deal?

Over the weekend, I wrote a “Pros/Cons” list to help decide whether we stay in our current rental home or try to buy a home.

After finishing the list, I had four items listed as “negative” and 16 items as “positive.” The cons were against buying a home, while the pros were in favor of buying a home.

Big difference.

So this weekend we spent time looking at “inventory” homes — basically, new homes that had been built on speculation, but hadn’t sold yet.

There are literally hundreds of these homes available in almost every major city. They’re sitting empty, so they cost the builder money every single month.

When the builder starts to have cash flow issues, he’ll heavily discount a spec home just to get it out of his inventory.

Often, when a builder has a large number of spec homes, he could be forced into bankruptcy.

This is just what’s happening in the Denver area.

In the Sunmarke neighborhood south of where I live, the builder pulled out, leaving empty lots filled with weeds sandwiched between owner-occupied homes.

A builder of paired homes in the same area has a handful of units he can’t sell — and he was already telling me how much he was willing to reduce the prices before I even expressed any interest.

And another builder (Neumann Homes) went bankrupt, leaving a similar situation as that in Sunmarke: Empty weed-filled lots, brand new bank-owned homes, and (I’m sure) many disgruntled home owners who feel stupid for buying in that neighborhood.

So the outlook is not good for sellers. But it could potentially be good for buyers.

And we wanted to at least investigate before we made a firm decision.

Our conclusion: It’s best to stay where we’re at for now.

Home prices are still simply too high. Anything worth buying out here starts in the low $300s. Homes in this range are usually nice homes, but are poorly located. For instance, they might butt-up to a major road or intersection.

The prices go up from there, of course. To get a really nice home in a good location, you’d pay about $375K to $425K.

And remember: Our family is a bit unique. Since we have three kids and I work from home full-time, we need at least a 3-bedroom home with a study; preferably 4 bedrooms and a study.

So the decision, for us, is to wait a little bit longer — despite having more reasons to move than not to move.

Which brings me to a question: What’s better — a higher home price with a lower mortgage interest rate… or a lower home price with a higher interest rate?

I bring this up because a TIME magazine article posed this scenario in an article published in February 2008. One of the builders (Village Homes) had made photocopies of the article and was using it as a marketing piece to encourage people to buy now instead of later.

Here is their hypothetical case study:

As you can see, the author of the article, Dan Kedlec, uses this example to make his case against waiting to buy.

He argues: “Finance costs will rise as the economy recovers, so trying to time real estate might not pay off.”

Translation: If you wait, home prices may drop, but interest rates will rise, negating any advantage you might have gained from waiting.

That’s his logic.

But does it hold up?

I don’t think so. Here’s why.

When you buy a home, the price is the most important factor, not the interest rate.

That’s because you can’t change the price of the home after you buy. After you’ve bought, you’re “locked in” so to speak.

Interest rates, on the other hand, fluctuate quite a bit. So while you might pay a higher interest rate later (emphasis on might), chances are you’ll be able to refinance to a lower rate sometime down the road.

Furthermore, Kedlec’s conclusions are based on the idea that you will make minimum payments and take a full 30 years to pay off your mortgage.

But what if you want to pay off your mortgage sooner? Would you rather pay off $197K or $218K?

The answer is quite obvious.

All things being equal, I would MUCH prefer to buy a home at a lower price with a higher interest rate vs. a home with a higher price at a lower interest rate.

That’s why I think Kedlec’s argument against waiting to buy simply doesn’t work. It looks good at first glance, but doesn’t stand up to scrutiny.

Given the current market conditions — and the probable economic crisis that’s coming — I feel it’s best to exercise some patience and postpone a home purchase for at least six months.