With the recent interest
rate increases over the last few months, buyers and sellers may be wondering
how this will affect the housing market now and in the future. Is this the right time to buy? Is this the
right time to sell? Here is my opinion on this matter in hopes of shedding some
light on the subject.
Over the last few years we
have been enjoying "artificially" low interest rates thanks to the
Federal Reserve (Fed). Their involvement has kept rates at record lows in hopes
of stimulating and nurturing the housing recovery. In June they announced that
they would begin slowly pulling out of the bond buying market starting in 2014,
which will cause rates to rise even further. Predictions are in the 6-7% range
by next year. While this is a dramatic increase from the 3% we have become
accustomed to, it's important to remember that it would still be historically
lower compared to the last 40 year average. As I said, these current rates have
been "artificially" low and were not meant to last. In a large part
they have done their job as the housing market has begun to recover, although,
we still have a long way to go.
NOTE: I encourage seller's
to read this too since buyer mentality affects your ability to sell and afterwards you may become a buyer yourself.
Is this a good time to buy?
The original housing bubble
was caused by loosening lending guidelines that allowed almost anyone to
qualify for a home regardless of income or credit. This caused a feeding frenzy
that shot home prices out of control. When the bubble burst, all lending
stopped! Almost over night the entire housing landscape changed as buyers were
denied loans and sellers were stuck in their homes. With buyers having no
ability to buy homes anymore unless they had cash, home prices plunged. The Fed
realized that the only way to get buyer's buying again would be to help get the
lenders back on their feet (a controversial subject that I have no intention of
touching here) and get rates low enough so that buyers could actually qualify
for a mortgage in the new economy.
By making the rates so
ridiculously low, it re-injected much needed interest as well as increasing
buying power to qualified borrowers. The theory behind the Fed control of
interest rates is that as the economy improves, jobs open up, and people start
making more money; they can afford more home. This means (in theory) that they
can raise rates slowly without hurting the housing recovery. All of this
assumes of course that the job reports continue to show signs of improvement.
As a potential buyer in this
market you should be asking yourself two questions:
1) Will rate go back down?
2) Will home prices continue to rise?
The answer to the first
question is probably not. The era of artificially low rates is over. It is
costing our government a tremendous amount of money to keep these rates low and
our budget simply can't sustain it forever. Like it or not (pending some sort
of disaster) the Fed is pulling out and the market will decide what the rates
should be.
The answer to the second
question is maybe. As of this writing, it is a "Sellers Market". What
this means is there are more buyers then there are inventory of good homes for
them to buy. This drives home prices up as demand for housing increases. Should
that slow down due to higher rates then those increases could stagnate.
Unfortunately,it's too early to tell what will happen to home values. But (AND
IT'S A BIG BUT), it may not even matter(see the example below).
Example:
Using a home price of
$150,000; let us see how these scenarios affect you:
Price Rate P&I
A) $150,000 4.5% $760.03
(Average Rates Today 07/2013)
B) $150,000 6.5% $948.10
(Possible rates next year)
C) $140,000 6.5% $884.90
***
(Possible rates next year with
price drop)
***What is interesting here is that if you wait till next
year in hopes that home prices drop, after less than 5 years the home would actually
cost you more to own than if you bought it now at a higher price!***
Here is why:
Yearly interest on a mortgage of 4.5% breaks down like this:
Yr1:
$6,700.50 / Yr2: $6,589.33 / Yr3: $6,473.05 / Yr4: $6,351.44 / Yr5:
$6,224.24
Total interest paid for the first 5 Years: $32,388.56
Yearly Interest on a mortgage of 6.5% breaks down like this:
Yr1:
$9,053.93 / Yr2: $8,949.13 / Yr3: $8,837.31 / Yr4: $8,718.01 / Yr5:
$8,590.71
Total interest paid for the first 5 Years: $44,149.09:
***So after only 5 years of ownership you will have paid
$1,760.53 more for the property that you paid $10K less for! What's worse is
that number continues to grow every month eventually costing you a whopping
$54,952.21 over the 30yr term of your mortgage!***
So if you are waiting for
rates to go down, don't, because they are only going up from here and if you are
waiting for home prices to fall, don't, because of what I just explained above.
The time to buy is now!
Is this a good time to sell?
There are many reasons
people need to sell that have nothing to do with the market such as Divorce,
Probate, Foreclosure, ect. For those sellers the decision is not always up to
them and they make due with the market they are in. But what if you're not in
distress and simply want to sell to upsize, downsize, or relocate? You want to
maximize your home's value so you can net the highest amount of money. For you
the only question is will home prices rise or fall in the near future.
No one can predict with
complete certainty what will happen to home values, however, by understanding
what affects home prices, we can make an educated guess. To put it simply, a
home is worth what a buyer is will to pay for it. An easy enough concept to
understand as long as that buyer is paying all cash for the property. However,
once you add financing to the equation, it becomes a bit more complicated.
Over the last 7 years one of
the biggest issues we have had in the real estate market were low appraisals. Let's
say a buyer wants to buy a home on sale for $200K. He or she has been
prequalified for an FHA loan for $200K and has just enough for the 3% down
payment and closing costs. The buyer and seller sign the purchase agreement and
inspections and financing begin. In about two weeks the lender completes their
appraisal of the home and find that it only appraised for $190K. Since the
lender will only lend on the lesser of the purchase price or the appraised
value, the buyer would need to come up what an addition $10K that he or she may
not have. So even though the buyer was willing to pay $200K for the property,
the lender was not and the deal has to be re-negotiated or cancelled.
Thanks to plenty of cash buyers
and investors both foreign and domestic, we have seen a steady uptick of
appraisable property values again. This coupled with the artificially low rates
have created a "Seller's Market" of low inventory and higher prices.
What this means for you is that smartly priced homes today will sell faster and
for more money.
What might cause home values to go down again?
The new issue we will face with
the rise of interest rates will be the decrease in a borrower’s “buying power”. Communities typically
are divided by invisible lines that determine their value based on location,
construction, and design. Each area
attracts buyers of a particular economic range that can afford homes in those
areas. Because the rates have been so low, buyers have been able to pay more
for homes (as long as they appraise) without increasing their mortgage payments
to the point where they can no longer qualify for their loan. When rates rise,
that buying power goes down because at the end of the day, the buyer is still
making the same amount of money. The buyer has no choice but to offer less for
a home in order to not exceed his/her debt-to-income ratio or pull out of the
market. If sellers don’t budge on price because they are unaware of this and
buyer’s withdraw from the market or look elsewhere for homes, the inventory of
unsold homes may rise. When that happens, we may switch back to a buyer’s
market due to the oversupply and eventually you may see a dip in home values
again. I don’t believe this would be a severe or permanent dip but rather a “market
correction” resulting from the artificially low rates that will balance out
over time.
So do you sell now or wait?
There is no question that if
you want or need to sell, now is the perfect time to do so. If you’re concerned
that after you sell you don't want to have to buy in a "Seller's
Market" yourself; keep in mind that in the long run, you will benefit more
from the lower interest rates now rather than the higher ones later (see buyer’s
section up top).
In conclusion, it's
important for us to educate ourselves in the current real estate environment
because I truly believe that we are on the tail end of one of the greatest
times to buy or sell that we have seen since the initial bubble burst over
seven years ago! No one can predict the future, but regardless of what happens,
I'm confident that the real estate market and our economy as a whole will
continue to improve. We will have our ups and downs but what's important is
that we learn from our mistakes and emerge from them better than we were
before.
The time to take action is now!
