Durango Real Estate Update

A look at the real estate market of a beautiful mountain town

Wednesday, March 18, 2009

Should I Buy a Home in Durango This Year?

This is one of those articles that you simply have to pass along, written by Luke Miller, an assistant Professor of Business at Fort Lewis College and co-director of Economic Analysis and Business Research at Fort Lewis College:

When should I buy a house? That is a question on many people's minds these days. Some markets have seen home prices cut in half (or more) over the last two years, whereas, other markets, such as Durango's, have seen home prices correct 'only' 15 percent from the peak. My answer to this question may surprise readers familiar with my column. As I still believe home prices in Durango will continue downward until 2010, it might be worth coming off the sidelines this year to purchase a home. I say this not because I believe Durango will buck the national housing trend, but because monetary policy set at the Federal Reserve level has created a rare opportunity for borrowers.Specifically, mortgages are in the 5 percent range, and possibly will be lower before this year is out. Additionally, I further believe the Federal Reserve is setting the nation up for significant inflation once we recover from this recession.Historically low mortgage rates today, combined with the potential for hyperinflation (and much higher mortgage rates) within the next couple of years, could point to home ownership sooner than later.Let me further explain my logic with a simple example. Assume a $400,000 home today, with the borrower financing 80 percent of it, or $320,000. At 5 percent mortgage rates, the monthly payment would be $1,718. Now, assume home prices fall an additional 20 percent in Durango over the next two years, but mortgage rates spike to 7 percent (still below the long-run historical average of 8 percent). This home would be selling for $320,000, with the borrower financing $256,000. The monthly mortgage payment would be $1,703. In other words, the monthly carrying cost of the home remains relatively constant with the downward move in home prices and the upward move in mortgage rates.If people believe they will call Durango home for some time, found a house they loved and qualified for a 5 percent mortgage rate, then purchasing today would not necessarily be considered a bad decision.In fact, it could be argued the monthly mortgage payment on this home will remain in a tight range over the next several years with a tug of war between home prices and mortgage rates.With no one capable of perfectly timing the market and homes a historical inflation hedge, home ownership should be considered for the right type of buyer.Let me wrap up by saying I am not unconditionally recommending home ownership. Given economic uncertainties, increased unemployment levels and the financial commitment of a mortgage, the decision to purchase a home should not be taken lightly.Further, it should be noted anyone that 'must' sell the home he or she purchases today within the next several years, will more than likely incur a loss.However, if you are confident you will be in your home for more than five years, then seriously consider that home with a view or close to downtown and great Durango schools.

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