Prudent home buyers and investors who stayed out of the overheated real estate market of 2004 and 2005 are now poised to reap large rewards if higher interest rates don't spoil their party. The median home price in Yuba City has dropped 32% from $352,950 in November of 2005 to $240,000 as of December 2007!

Interest rates have remained relatively stable at under 7% since May of 2002. However, there are storm clouds on the interest rate horizon in the form of potentially higher inflation. The Federal Reserve continues to lower interest rates and pump money into the economy. The Dollar continues to weaken against all major foreign currencies. Economic expansion in China, India, Russia and other countries (sometimes referred to as the "emerging markets") are driving commodity prices up. At this writing, gold and oil are both at historic highs. Metals like steel, copper and aluminum are all up dramatically. Most farm commodity prices are up.

Production costs in China are rising and there are now even reports of some Chinese companies out sourcing production to countries like Vietnam in an effort to contain rising costs. Higher production costs will ultimately result in higher consumer prices on those items we import from abroad.

Our food and gasoline prices are already up dramatically and many people are worried about significantly higher rates of inflation.

One of the effects of higher inflation will be higher interest rates and reduced purchasing power by those who will be financing their purchases. While most economists don't believe that we will see much change in the rate of inflation or interest rates during 2008, how many people predicted the mortgage market melt down of August 2007?

Potential home buyers can be broken down into two categories, all cash buyers and those that need to finance their purchases. Higher interest rates will not affect the all cash buyers but will have a significant impact on the vast majority of people who rely on borrowed money to finance their home purchase.

If you are an all cash buyer and don't have a home to sell, then you should be able to rest comfortably knowing that your patience will result in a lower purchase price.

If you will be financing your next home, then you really need to weigh the risks of higher interest rates against the benefit of lower prices. A jump in interest rates from 6% to 8% will increase your principal and interest payments by over 22%. In the two month period between February of 1980 and April of 1980, interst rates rose by over 3% from 13.04% to 16.33%.

Home prices in the real estate market recession of the 1990's dropped 40% and they are already down by 32% during this recession. How much lower are prices likely to go? We don't think they will drop more than the 40% they dropped during the last market recession and if you would like to call us we will be happy to explain our logic.

I am NOT saying that interest rates will go crazy like they did in the late 1970's and early 1980's. What I am saying is that prudent people should seriously consider foregoing lower home prices in favor of locking in an affordable interest rate.

The reason that you are able to take advantage of today's lower home prices is that too many people forgot the two most important elements to a good home purchase and are now losing their homes.

THE TWO MOST IMPORTANT ELEMENTS IN ANY HOME PURCHASE ARE;

1. FIND A HOME THAT YOU CAN AFFORD.
2. FIND A HOME THAT MEETS YOUR LONG TERM NEEDS.