Is It Worth Waiting
For a Price Break?

Question: My wife and I are moving to northern Virginia from Boston because I accepted a government job in Washington, D.C. I noticed that real estate is as hot in the D.C. area as it is in other areas. If I purchase a home right now in the D.C. area and borrow $300,000 for 30 years at an interest rate of 5.5%, my monthly payment would be $1,703.37. If I wait and the housing market cools because the 30-year interest rate goes up to 7.5%, that $300,000 home might be listed at $275,000 because of the cooler market brought on by the higher interest rates. My monthly payment in this scenario would be $1,922.84. Is it really wise to wait for the housing market to cool?

Mike: You ask a very good question. Part of the answer is that the housing market can go way up as well as way down. During the real-estate recession of the early 1990s, housing prices in some areas of the country fell as much as 30%. That means that a home that had been listed at $300,000 was then selling for around $210,000. While no one is anticipating another big drop such as this, who knows? Prices have been shooting up for the past five years and a correction may be in order.

The other part of the answer has to do with interest rates. Normally in this stage of an economic recovery, one would expect interest rates to begin rising. This would help to cool the economy and the super-heated housing market.

However, because this has been a relatively jobless recovery, because inflation has been fairly low, and possibly because this is a presidential-election year, interest rates have been kept low. Indeed, mortgage rates actually have declined over the past few months. We are still near 40-year lows.

As a consequence, the high volume of home sales has been fueled in large part by people who want to take advantage of those low rates. They are willing to potentially overpay in order to tie in those rates. However, I can assure you those same people will really question their actions should interest rates suddenly rise, sales dry up and prices significantly fall.

In the final analysis, it becomes a balancing act. You have to balance the mortgage interest rate you can get with the price of the home. If some real-estate markets continue on their current track, eventually home prices will climb so high that even low rates won't entice buyers.

Question: We live in San Mateo, Calif,, and we are considering selling some stock options to invest in real estate in such areas as Las Vegas, Sacramento, Calif., San Leandro, Calif., San Diego and San Jose, Calif. The prices in these areas have gone up tremendously. We are in our early 30s with two children and already own a home. We really regret selling our first house in San Mateo to invest in the stock market in 2000. Should we sell some options and invest in real estate?

Christina: I can't tell you whether or not to dump your stock options. It really is a financial decision based on how valuable you think they are or will be and what place they hold in your overall financial situation. You should probably consult with a good financial adviser on this.

As for investing in real estate, my suggestion is that you do it close to home. Investing in property far from your home is a bad idea because it's so difficult to manage the property. As an owner, you're also a landlord. That means you'll need to take care of renting out the property, cleaning after tenants and handling maintenance chores. If the property is 30 minutes from home, it's fairly simple. If it's hours away, it's far harder. And if you hope to rely on a property-management firm, be sure you have deep pockets. These firms charge a hefty fee (often more than 10% of the rental income) for their services and often hire out maintenance work to such licensed professionals as plumbers, electricians and so forth at top dollar. Sometimes this is the sort of work, such as changing a washer, that you can do yourself for next to nothing if you live nearby.

Further, the price jumps you speak of in these markets happened in the past. It's not clear that they will repeat in the future. Most of the areas you mention took big leaps because their housing market was undervalued, compared to elsewhere. That may not be the case anymore. Should interest rates go up, as they may very well do in the near future, these formerly hot markets could cool off very rapidly.

Question: My boyfriend just signed a six-month contract with a realtor who will be selling his house. Can he change his mind? Will doing so cost him anything?

Kathi: A listing is intended to be a legally binding contract. When you sign it, you give the agent the right to find a buyer for your home at an agreed-upon price and terms for the time indicated. In your case, that's six months. Theoretically, if you want out before then, you could be liable for the full commission.

In actual practice, however, agents will often give back a listing if the seller is unhappy for a good reason. For example, illness, job loss, or divorce can suddenly change a person's financial situation. I would guess that most agents would give back the listing if selling were to produce a financial hardship.

On the other hand, if the reason your boyfriend wants to get his listing back is to give it to someone else who's a friend, or to another agent who has promised some sort of perk, then it may be a different story. Call the agent, explain the situation and see what can be done.

-- Mr. Irwin has more than 25 years' experience as a Los Angeles-area real-estate broker. He is the author of more than two dozen books about real estate and is recognized as one of the most knowledgeable writers in the real-estate field. Mr. Irwin's most recent books are "How to Get Started in Real Estate Investing" and "How to Buy a Home When You Can't Afford It" (McGraw-Hill, 2002).

Submit your question to realestatejournal@wsj.com, with your first name and the city where you're located, which are required to publish your question. If your question is answered and posted, we will show your first name and city.

Although we can't acknowledge all e-mail, we'll answer as many questions as possible.

Email your comments to rjeditor@dowjones.com.