Buy a Home on Kauai Now or Wait?

The question I’m often asked, as soon as someone finds out I’m a Realtor here on Kauai, is “How is the real estate market?” The expected follow-up question is usually something along the lines of, “Are prices going to continue to fall?”

Of course, no one can pinpoint with accuracy when the bottom of the market is going to hit, or whether we’re hitting it now, or if it has already come and gone.

This beautiful 4 bed/2 bath house (MLS# 236180) currently on the market for $674,900, sold in Nov. 2005 for $1,039,000

In my opinion though, the more important question is, is the rock bottom of the market the best time to buy a home? Most would say yes, while the real answer is, it depends. Why? It’s because there is more than one factor at play than just rock-bottom prices. What is it? Interest rates.

Now, if you’re among the few who have cash in hand and don’t need a loan to purchase a home, loans/interest rates really don’t concern you, and you are in the unique and privileged position to play “wait and see what happens in the real estate market” before you jump in.

However, if you’re among the vast majority of us who need a loan to purchase a home, interest rates are a big factor and concern. Interest rates have a huge bearing of the affordability of a home and the budget we set for it. Even the slightest quarter of a point makes a difference. So, really, we can all agree that buying at the very bottom of the market with high interest rates is definitely not the most ideal time to buy.

There’s really only so many variables that can happen between home values and interest rates; one rises while the other falls, or they both stay relatively on the same wavelength, whether it is high or low. A good question to ask ourselves is, what if home prices continue to fall while interest rates rise? This is a very real possibility. Imagine for a moment, home prices decreasing, but the interest rates rising a quarter, then half a point, then a point, and so on. What will that do to your buying power?

When running some numbers, you may be surprised at how much your buying power diminishes, and you may not get as much bang for your buck, so-to-speak. The reality is, home prices may have to drop quite substantially to make up for a higher interest rate. You may have to ask yourself which is more likely to happen, interest rates rising, or house prices dropping significantly more than they have already? Will homes on Kauai drop to 1990 levels?

When examining the market, it doesn’t seem likely. Will interest rates rise anytime soon? Interest rates have been low for quite some years now, so it’s safe to assume they will rise again as they always do. It’s really just a matter of when and how fast. What we do know for sure in this market is the following, the home bubble has burst and homes are at an all-time low coupled with historically low interest rates. Is now a good time to buy? I would say without a doubt, “Absolutely!”

I hope I’ve provided some thought-provoking questions to think about for those who want to buy, but remain on the sidelines, wanting to jump in at the most opportunistic time.

I set up a chart with a few examples to illustrate the point below.

Home price: $674,900                   Home price: $674,900                     Home price: $491,000 (37% drop)

20% Down payment: $134,800   20% Down payment: $134,800      20% Down payment: $98,200

Loan amount: $540,000               Loan amount:  $540,000                 Loan amount: $392,800

Interest rate: 4.8%                          Interest rate: 7.8%                             Interest rate: 7.8%

Monthly mortgage: $2,833.72      Monthly mortgage: $3,887.30        Monthly mortgage: $2,827.65

Interest paid/life of loan:               Interest paid/life of loan:                 Interest paid/life of loan:

$480,037.00                                     $859,428.50                                       $625,155.77

This house would have to drop in price by approximately 37% (from $674,900 to $491,000) to make up for a higher interest rate of 7.8% when it comes to your monthly mortgage payment.

Whether you are in the market as a first time buyer, looking for a vacation home, or just want to relocate to one of the most beautiful spots in the world, there are some amazing real estate opportunities here on Kauai.

Please contact me. I would be happy to answer any questions you might have regarding buying, or selling real estate here on Kauai.