My friend, mentor, and excellent real estate agent in Austin, Texas, Krisstina Wise originally published this piece on her blog. I have taken the general information presented and related it to our local marketplace. My commentary is in italics throughout the article.

On the fenc

e?

• If I said that Interest Rates were going to increase tomorrow?
• If I said home prices were going to increase tomorrow?
• And if I said that both interest rates and home prices were going to increase tomorrow?

According to the report released by Bank of Canada Governor Mark Carney last week, we can fully expect interest rates to rise, although it won’t be tomorrow. Likewise, according to the activity we see in real estate markets around Southern Ontario, there is a likelihood of house prices increasing. The laws of supply and demand dictate that a shortage of product and an abundance of buyers is the recipe for prices to rise, and we are most certainly in that position.

What would you do?

I wonder why people today are on the fence. The question is somewhat rhetorical because I’m pretty sure that it is because they are waiting for prices to hit bottom – but really - are we still kidding ourselves to think we can time the market? Even expert investors are kicking themselves for failing to spot the bubbles in both the housing and stock markets — Isn’t that indicator enough that we cannot?

So if we are on the fence because we are waiting for bottom – that begs the question of:

“What is the Bottom?”

I think that most people think of “The Bottom” as housing prices hitting bottom before they begin their upward climb. But, if we agree that we can’t time the market, then really, how do we assess a good time to buy? How do we know the bottom when we can’t predict the bottom?

To answer this question I use the “Housing V”

The V shows us that the “Bottom” is not solely determined by home prices hitting “Bottom”, which is what I think most people think the “Bottom” is. The V shows that the “Bottom” is where both Interest Rates & Home Prices are at, well, the bottom (of the V). So let’s take a look:

To explain, let’s look at 3 different situations.

Situation 1:         1980s:

• Where were IR’s?
• Where were prices?
• Where was your mortgage payment?

In the market crash of the 80s, prices were at an all time low. That was the good news if you were a qualified buyer. The bad news was that the Interest Rates (IR’s) were at a record high (18%).

So, despite prices being low, High IR’s limited your buying power.

Situation 2:         2000s:

• Where were IR’s?
• Where were prices?
• Where was your mortgage payment?

In the mid 2000’s, before our recent crash, IR’s were historically low, BUT prices were at record highs. Yet, buyers flooded the market pushing prices even higher.

So, despite IR’s being low, high prices limited your buying power. Most buyers could only buy because of sub-prime loan deals.

Here in Canada, we didn’t have the same kind of sub-prime mortgages that they had in the USA, but we certainly had some questionable lending practises going on. People were racking up great debt levels on the backs of low interest rates, not only with mortgages, but with easily-attainable credit for most-all purposes. Fortunately, our financial system has the checks-&-balances in place to prevent the mess like the USA experienced.

Situation 3:         2009!:

• Historically low interest rates AND Low home prices

Right now, we are in what I like to call the ‘Buying Zone’. Interest rates are at historical lows. AND, Austin (milton house prices are following the same trend as those in Austin, as of the date of writing) home prices are lower than they have been in years. This combination of low rates and prices produces the perfect storm for buyers. Never, in my career, have we experienced this situation. I have only ever seen either one or the other of the two previous situations.

So let me ask you, do you really think interest rates will continue to go lower?

Do you really think prices are going to drop much more? Really?

How likely do you think it is that both dots will drop lower on the graph?

And, what happens if either dot jumps higher on the graph?

The Buying Zone

My interpretation and speculation: we are at a bottom. We are, in this moment, in a time where we can take advantage of both low interest rates and low prices meaning the ideal ‘buying zone’. What is important to note is that inflation equals higher IR’s. Interest rates are artificially low because the Fed is holding them down in order to stimulate the sluggish economy. Once the artificial hold is released, interest rates will climb. It is a matter of fundamental economics.

In addition to the perfect storm of a buying zone, in Austin (same goes in Milton) we have noticed spikes in sales activity, higher asking prices, multiple offers, shorter marketing times, more construction starts, and fewer incentives. Yes, in my interpretation, now is a time to buy and if you wait much longer – you may have missed one of the best buying opportunities we have seen in a long time. Waiting will mean a higher mortgage payment. Even if prices were to drop a little more, if interest rates spike, you will have waited too long. Another instance of “bad timing”.

Here come higher interest rates … if that is true … what will you do?

As further commentary, the Bank of Canada recently has started saying that it cannot guarantee holding off on raising interest rates until next Summer. Following is the just-released schedule of monetary policy announcement dates:

OTTAWA – The Bank of Canada today released its 2010 schedule of eight dates for announcing decisions on its key policy interest rate and confirmed the announcement dates for the remainder of this year.