SANTA CRUZ (September 26, 2009) - These words of wisdom, ‘he who hesitates is lost’ are certainly applicable to today’s real estate market in Santa Cruz. There has been much written (not only in this column) about the general state of today’s housing market and why this is a good time to take advantage of home prices and low interest rates but I have seen no dollars-and-cents analyses.

It is well known that the federal government realizes that the housing industry (new construction as well as sales of existing homes) must recover to pull this nation out of the current economic doldrums. Towards that end the Federal Reserve left its interest rate target unchanged at zero to 0.25% (this primarily affects short term loans between banks) in its meeting earlier this week and it also announced that it is extending (and gradually phasing out) its purchase of mortgage-backed securities into the first quarter of next year. This means that mortgage rates will likely not have a lot of upward pressure immediately but there will be a gradual increase in mortgage rates as the markets prepare themselves for the day that the fed is no longer supporting the mortgage-backed securities market.

The $8,000 tax credit for first time homebuyers is still scheduled to go away for those who do not close escrow on their first home by November 30. There certainly is pressure on the federal government to extend this program into next year and even to increase it to $15,000. However, at this time, it is unknown whether either of these two scenarios will play out.

It is widely believed by those who watch the real estate market here that home prices have generally bottomed out and are heading upward. Very low home sales over the past few years indicates that there is pent up demand for housing. Anyone actively looking for a home today will tell you that multiple offers are prevalent and that many homes are going for more than the asking price.

Combine the prospect of rising rates with the gradual increase in home prices and you get a lost opportunity for the prospective homebuyer. Let’s look at a home for $500,000 and a loan for $400,000, the PITI (principal, interest, taxes and insurance) will be $2742 at a rate of 5.00 percent. If we assume that rates next year will be at 5.50 percent and that the price of this same home goes up just 4 percent to $520,000, the PITI will be $2979.

Over a 30 year period, waiting will cost the borrower $85,000 in increased payments plus the $8,000 tax credit plus an additional $5,000 in down payment and closing costs. The cost of waiting in this example is $98,000!

This column is written every Saturday by Peter Boutell, Certified Mortgage Planner and a principal at Santa Cruz Home Finance. You may reach him at (831) 425-1250 of email him at Peter@SantaCruzHomeFinance.com.