What is a good way for an every day buyer to decide if it’s time to take the big step of buying a house?
With the recent trend of interest rates still incredibly low and house prices going up, realtors are pushing prospective homeowners to buy before price go up or monthly mortgages becoming not-affordable to most.
“If you’re on the fence about buying a home, right now is the best time to do it,” confirms Don Frommeyer, the chief executive officer of NAMB, the association of mortgage professionals. He thinks prices, while higher than they were a year ago, are not unrealistic. With mortgage interest rates hovering below 4%, Frommeyer thinks it’s an ideal moment to buy.
But news media channels, real estate experts are exhausting consumers to buy before the prices continue to rise. Even if the economic conditions are right, it’s only a good idea to buy if the decision makes sense for you financially and you find the ideal house.
The Time Seems Right, But…
“It feels like we should be buying,” says Liz LaBrocca, a college communications coordinator in Northampton, Massachusetts, who currently rents a townhouse with her boyfriend, a graphic designer. “It feels like it’s a good time to buy a house, but I’m not 100% sure about that.”
That’s reasonable — experts aren’t clear whether house prices are going up or down, while many articles show the contrary, that the housing markets in certain areas are likely to rise until 2017. Interest rates have a more clear indication to predict with the Federal Reserve talking about a mid-year rate increase, which would have an immediate effect on the interest rates available to those applying for mortgages.
It can be hard for buyers to weigh economic factors like interest rates and market trends with personal situations varying — such as a stable, good-paying job — as well as location. Whitney McIntyre Miller, a college professor, recently relocated from Cincinnati to Long Beach, California, with her husband and toddler. “The house we owned in Cincinnati versus the same house here — it’s two to three times the price. Probably closer to three times,” she said.
News articles and friends who work in real estate are making Miller and others think this would be a good time to buy, but she’s still learning which neighborhoods she prefers, and many people are buying mainly based on the school district so their children get the best possible education from any early age.
“We’d rather get the right house for us this time around than rush into something,” she said.
It’s Not An Emergency
Frommeyer thinks that a wait and see approach might be risky — its not a good idea if you wait too long. “I don’t foresee rates jumping very quickly, maybe later in the third quarter,” he said. House prices are strong, but Frommeyer thinks they’re also realistic, and buyers who try to lowball lose any chance of becoming new homeowners. Many buyers wish they had a crystal ball to predict whether house prices will go up or down in the near future. “Are prices going to start skyrocketing over the next few years, and are we going to miss our window if we wait too long?” LaBrocca wonders. “It’s a huge investment.”
Right now, buyers have the best of both worlds -- home prices have risen, but they're still below the bubble from 2005, and mortgage interest rates are just above record lows. Yet, many buyers are still waiting for a sign that it's the right time to buy but that might not be the best choice.
Should you wait for prices to go down or for lower interest rates? We advise that you do neither. The price of a home is fixed, so it makes sense to wait for prices to go lower, but you may not realize is that prices have to drop significantly to beat a minor fluctuation in mortgage interest rates.
Home prices have been rising for the past five years, sometimes in the double digits. Between January 2014 and January 2015, home prices rose over six percent. If sales continue at the current pace, it's more likely that the home you don't buy today could be more expensive later.
In the time you wait for price reductions, you could effectively build equity, or ownership in your home. Few homeowners keep a loan for 30 years anymore. People change jobs, get divorced, move up, downsize, refinance and have other reasons for not keeping their original mortgage. So the time is now.
So let's look at a few what-ifs and see when it's best for you to buy a home. Using round numbers, on a $200,000 30-year, fixed-rate mortgage at 4.00 percent, your monthly payment starting May 2015 will be $955. At seven years, the average length of time that most buyers occupy their homes today, you will pay $52,898 in interest and the remainder of your loan will be $171,738.
If you wait around and interest rates go up, you'll be paying more monthly, plus you won't build equity as quickly. At 4.5 percent, your monthly payment will be $1,013 and you'll pay $59,828 in interest. Your loan remainder is higher - $173, 692. A half a point increase in interest will cost you $58 more per month, $6,930 more in interest, and you'll end up with $1,954 less in equity.
If your home dropped 5% in value and you were able to get a loan for $190,000 and 4.5% interest, your payment would be $963, a difference of $51 less per month than if you'd paid $200,000.
But what if you're wrong and prices go up by five percent? At $210,000 and 4.5 percent interest, you'll pay $1064 per month, $62,820 in interest, and the remainder on the loan will be $182,376. That's a difference of $109 more on your monthly payment and $9830 more in interest, plus you'll lose $10,638 in equity.
Daniel Lalezari is with Coldwell Banker Previews International Beverly Hills Office. He works the Greater Los Angeles area. If your looking to buy, sell, or invest in Real Estate please call him at 818-416-2756.