Mar 18, 2022
*** VIDEO TRANSCRIPT ***
One of the most frustrating parts of my job is watching people lose out on the opportunity to become a home owner or the opportunity to own a home here. I remember one customer in particular, who was a close friend of mine. Kristina approached me around Christmas about three years ago and wanted to buy a house. She had a budget of around $350,000. Interest rates were around 4% at the time. She qualified easily. The payments were easily affordable for her. But she couldn’t find exactly what she wanted.
Kristina and her REALTOR must have looked at two dozen houses over the next several months. But there was always something wrong with every house they looked at. One house smelled funny. Another house had foundation issues. Another house was rejected because it was heated by an oil furnace. She didn’t want oil heat.
And you know what happened to Kristina? She got priced out of the market. That house with the oil furnace that she could have had for $350,000 in 2018 would cost about $525,000 today given rates of appreciation over the last several years. In order to buy that house today, Kristina would need a whopping $30K more for a down payment and her monthly payment would increase more than $700/month.
We hear a lot of arguments for waiting.
Some buyers, like Kristina, just can’t find what they want. Another justification that we hear is that buyers want to save more for a down payment. Others want to work on their credit for a while. I talk to people occasionally who believe prices are going to decrease. I don’t agree and that’s a whole different video.
No matter the reason, there are three different variables in the Cost of Waiting equation:
- Home Prices
- Interest Rates
- Lost Opportunity
Now I want to take you to my desk and show you how I analyze two of those variables. One second while I engage my teleportation device…
Whoo… Here we are. This spreadsheet is a great tool that I use to visualize the significance of home prices and interest rates over the next six months, one year, two years, and three years.
Now obviously, we don’t know for sure. So I’m being very conservative with my estimates. We have seen appreciation rates of 20% or more annually over the last few years. Most experts that prices will continue to increase moving forward, albeit at a slower rate.
We are also in a rising interest rate environment so I have also estimated very modest interest rate increases.
I started out with a property value of $525,000. That’s how much Kristina’s $350K home would cost today. 20% down = a little over $100K down. I estimated an interest rate around 4.25% which gives us a monthly payment of $2066 before we add property taxes and homeowner’s insurance.
If our hypothetical buyer waited just six months, home prices increased just 2.5%, and interest rates increased a meager 0.25%, our buyer is now paying $115 more per month for the same home.
If he wants the same monthly payment he could get today – so $2066 – he’d need $130K down instead of the $105K he could have invested today.
If our buyer waits one year, prices increase 5% above today’s prices and interest rates increase 0.5%... Our buyer now needs $230/more per month for the same home.
After two years and another 5% increase in prices. I actually kept interest rates the same. Still, that monthly payment is now $344 more than it would be today.
And after three years, another 5% increase in price, and a 1% increase over today’s interest rates. Our hypothetical buyer is paying $600 more per month. Or… if he wants the same payment he could have today, he can come up with $230K, which is $125K more than he would need today.
If you are thinking about waiting to buy so that you can save more for a down payment, please use this spreadsheet as a guide. You are going to need to save SIGNIFICANT sums of money very quickly. Otherwise, you may be better off making a smaller down payment and buying now.
And while every buyer has their “must have” list, most people who are buying houses today aren’t planning to live in them forever. If Kristina had bought that $350,000 three years ago – oil furnace and all - she’d have $175,000 in equity she could put toward a different house today.
If you’d like a personalized Cost of Waiting spreadsheet or you’re a spreadsheet junkie like me and you’d like to have your very own Cost of Waiting spreadsheet to play with, you will find all my contact information on my web site. I’d love to hear from you.
My name is Emily Caryl Ingram. I lead a team of Mortgage Loan Specialists at New American Funding in Port Townsend, Washington. Thanks for watching!