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Why Buying Now Can Save You Money Despite High Home Prices
While working with many buyers in today’s aggressive San Diego market, we’ve been hearing one major concern a lot lately. In fact, it’s been a question we’ve been asked so many times in the recent weeks, that we thought it necessary to write a blog post to help clear up any confusion for those of you asking yourself the same thing!
“In a hot seller’s market, like the one we’re seeing now in San Diego, with home prices continually on the rise, is now good time to buy? Or should we be waiting for home prices to come down and the market to cool off?” How many of you are asking yourselves this same question as you get frustrated looking for a home in a high-demand market? Not to worry, you aren’t alone! And we’re here to help you understand why now is an awesome time to buy!
Interest rates are currently at historic lows and while it’s all projection and speculation, many of the financial guru’s in the industry are forecasting that interest rates are going to increase after the election. Just how low are interest rates? Check out the graph below and I think you will be surprised. The Fed has met numerous times over the last few years to discuss raising interest rates, but after discussions each time, they have yet to really make any substantial change, leaving the rates as-is and setting a meeting to reconvene at a later date.
It’s hard to say if interest rates will in fact go up after the 2016 presidential election, but if they do, there are many people who believe that it will drive home prices down. The thought process here is that if interest rates increase, the pool of buyers that are able to afford a home will decrease. The decrease in demand will then drive down home prices. This is what many buyers are waiting for in their home buying process - the market to “cool down”, so they can take advantage of those lower home prices.
Not only are decreasing home values a big “what if”, like I said earlier, most financial gurus are not projecting the market to come down in price until interest rates go up. Even then, there is no guarantee that the home prices will decrease. Many buyers don’t keep the “big picture” in mind, but are very much fixated on that “price tag”.
The amount that the typical home buyer would pay towards their home over the life of a 30-year fixed rate loan can be determined a few different ways. You can use one of the many available mortgage calculators online, an excel/ spreadsheet formula, or the easiest and most accurate way, talking to your lender. But I don't want you to have to go through all that work so here is a quick example of how interest rates can have a dramatic affect on the cost of your home.
Example 1: If you have a $500,000 30-year fixed rate loan at 4%, you’d end up paying $859,347.53 over the lifetime of the loan.
Example 2: If interest rates go up, and home prices drop, and you are now able to get the same home in example 1 with a $400,000 30-year fixed rate loan, but interest rates are now at 7%, you end up paying $958,035.59 over the life of the loan.
Even though the home is $100,000 less in example 2, over the life of the loan, you end up paying almost $100,000 more because of a higher interest rate. Note that a rate of 7% used in this example is still very low by historical standards. In 1980 the average mortgage interest rate was around 15%!
Something to also keep in mind as you estimate costs, is that during this period of waiting for the market to cool down, you may also be paying an average of $1,500/month in rent, for a total of $18,000/year. So with each month/ year that you are paying rent, you are putting that money in your landlord's pocket as opposed to putting it towards building the equity in your own home.
So, what do you think? We’ll let you be the judge. With historically low interest rates, is now a good time for you to buy? ;) We’re here to help you out whenever you’re ready to get the ball rolling!
Comments (5)
Great article, really puts things into perspective for me. I'm just wondering if it would affect the market here in Vancouver when interest rates rise once again. In our market we currently have oversea buyers fully paying for 2 million dollar houses in cash subject free.
Stanley Kong, over 8 years ago
@Brian Maida - Typically 'adverse selection' begins to take place...the pool of people willing to pay high interest rates to borrow money have a higher default rate. Conservative and 'safe' borrowers decide to forgo a loan because the rates are prohibitive. In the same way the people most likely to get health insurance are those with poor health, those willing to pay high interest are statistically more high-risk, causing banks to get tighter with their money.
Ryan Kirk, over 8 years ago
@John Steele thanks for the post! It is always good to be reminded of these things and to get some historical perspective. Another angle for this discussion could be that as interest rates rise, the pool of home buyers may decrease but the pool of renters will then likely increase. Sounds like a wn-win for the real estate investor.
Matt Ashton, over 8 years ago
@Matt Ashton - Definitely! With money being so cheap in general, regardless of whether your a traditional buyer or an investor, the historically low interest rates are something that people should jump on.
John Steele, over 8 years ago
Is there any data out there for interest rates vs tightness of credit? One would think as interest rates go up, banks would take on more risk, thus creating more buyers and decreasing the pool of renters. Assuming credit standards didn't change and interest rates went up, common sense would say what you stated, but I am curious as to whether that typically occurs.
Joseph M., over 8 years ago