Plenty of pundits have pontificated that the only scenario in which real estate is likely to decline in value is a significant rise in interest rates, or a decline in local employment. The latter is too regionalized, and also not what I want to talk about. So, let's talk about interest rates.

I believe many regions in America are experiencing a period of Real Estate overvaluation. Call it a Real Estate Bubble if you want. With maybe a few exceptions, I don't think we are at those levels. If you own a house, I am not recommending that you sell and try to get back in at lower prices. But if you don't currently own a home (like me), should you buy now?

Let's say you are looking at a place for $550,000. That's probably a 1,400 square foot, three bedroom condo in a good neighborhood around here. Let's assume a 30 year fixed rate mortgage. According to bankrate.com, the average 30 year fixed jumbo mortgage rate is 6.40%. Assuming you came up with a 20% down payment $110,000, your mortgage payment, not including taxes and insurance would be $2,752.23.

Now let's say interest rates rise, ending the easy money train, and causing real estate prices to fall. How much they might go down is completely unknown, and varies by region. So, let's say it goes down 20%. It's a fair estimate given the magnitude of the run up in prices in some areas. You can now buy the same place for $440,000. So, your 20% down payment is now $88,000. But don't forget what prompted this. An increase in mortgage rates. So, let's say the average 30 year fixed jumbo mortgage is 8.6825%. Now, oddly enough, this lower price and the higher rate results in the same mortgage payment! Okay, so I tweaked the mortgage rate until I got the payment that I wanted. The results are still very realistic.

By the way, the smaller mortgage would not require jumbo rates, allowing for potentially lower mortgage rates, but we'll let that slide.

The net result is that your monthly outlay will be the same. It doesn't matter right? Buy now at high prices/low rates or buy later at not as high prices/not as low rates, your monthly payment is the same, thus there is no advantage either way.

Wrong.

There are specific advantages to the latter scenario.

There's the issue of the smaller down payment. The $22,000 difference could be used to make a larger down payment, reducing the monthly cost. It can furnish your luxurious two bedroom condo, or it can be saved/invested. This is opportunity cost. The earnings you could have had from your $22,000. Property taxes. I don't own a home, so I don't know all the ins and outs of this. But, my understanding is that most property taxes are roughly 1% of the initial assessment, potentially increasing every year depending on the rising value of the property. However, California has a law called Prop 13, that limits the annual increases to 2% per year. If your state has something similar, it is certainly in your best interest to start that calculator as low as possible. Income Taxes. The entire mortgage payment is not tax deductible (unless you have an interest only), just the interest portion. So, despite the equal payments, you will pay about $2440 more in interest for the house in the second scenario. This doesn't sound like a good thing, but it is. That means a larger income tax deduction. Refinance. If you pay less, but have a higher rate and rates subsequently decline again, you can always refinance your loan. If you pay too much, but have a low rate mortgage and prices decline you can't ask the seller to give you back your money. Accelerated payments. Many of us more frugal savers would like to be able to add extra payments to our mortgage to pay the loan down faster. If you follow the bi-weekly mortgage payment plan, or increase your payment by 8.33% to $2981.58, which is the same thing, you will pay your mortgage off in 291 months in the first scenario. With the same payment in the second case, you will have the loan paid off in 268 months. That's almost two years. Why does this happen? Because the extra payment goes to principal, and there's less principal to be paid down.

Bottom line: I'm not telling you not to buy a house right now. I do not know where real estate prices or mortgage rates are headed. This is a very personal decision, but do not be fooled into believing that if prices drop because of a rise in mortgage rates, there's no difference. There's a huge difference.