Frank (ljtourist) wrote,

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Behold the power of math

It's that time of year again where I get to decide how much longer I'm going to rent versus buying a condo or something. Rather than just guess what's better, I decided to use math, so I can at least have a solid concrete answer despite the solid handwaving behind it. :)

There's a blog called Seattle Bubble that has made a very convincing case that Seattle's housing market is just running some number of months behind the rest of the country's. At first their estimate was 6 to 12 months behind, but more recently it's been 15-18 months behind. So, the question I have to ask myself is: "If this trend continues, is it worth waiting for prices to come down while interest rates might go up?". In other words, assuming that I could get a 6% 30-yr fixed mortgage today, what would the interest rate have to be to get the same monthly payment if the price goes down X% in (say) 18 months, counting in the extra rent I'd be paying and the extra down payment I'd have? With the help of Gnumeric, I made a nice little table:

Cost decrease Equivalent interest rate
0.0% 6.42%
2.5% 6.68%
5.0% 6.96%
7.5% 7.24%
10.0% 7.55%
12.5% 7.87%
15.0% 8.20%
17.5% 8.55%
20.0% 8.93%

Now, this analysis ignores things like the future value of money (but considering it's only a 1.5yr difference, I feel safe ignoring that) and different tax deductions due to different interest rates, but I think that the odds of prices falling 10% or more in the next 18 months are significantly higher than the odds that interest rates will rise more than 1.5% in the same period. So, I guess I'm renting for that much longer. Yay math!

If I've missed something, or some financial whiz wants to critique this, I'd love to hear about it.

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