5 Reasons to Purchase a Home Soon in 2017
The cost of waiting to buy a home continues to increase for buyers. Mortgage rates and home prices both increased during 2016, and it looks like both will continue to rise in 2017. A lot of buyers asking if now is a good time to buy a home? Here are 5 reasons to purchase a home soon in 2017.
1. The Extra Cost of Waiting to Buy a Home
It is important that buyers consider rising interest rates and rising home prices when thinking about the true cost of a home.
Remember, cost is not determined by price alone but by price and mortgage rate. The longer a buyer waits to buy, the higher the mortgage payment will be if rates and home prices continue to increase.
For example, let’s look an example where a buyer can purchase a home today at $500k with a 4.25% 30-year fixed rate, compared to waiting 12 months to purchase the same home, but the home price has increased to $525k and the rate has increased to 4.75%.
On a $500k home with 20% down and a 4.25% rate, the principal and interest payment is $1,968 on a 30 year fixed loan.
But if the home price increases from $500k to $525k in the next 12 months (which is an annual appreciation rate of 5%), and mortgage rates increase from 4.25% to 4.75%, the monthly payment increases to $2,191, which is a monthly increase of $223 a month.
That means a buyer who waits a year to purchase a home, could pay an additional $80,338 in payments over the life of the loan to purchase the same home (see total payments above).
Therefore the overall price tag of the same home could get $80,338 more expensive.
2. Home Prices Will Probably Continue to Rise in 2017
Home prices will probably continue to move higher in 2017, as limited inventory is driving prices up.
As you can see below, home prices have increased approximately 32% since 2012, which is average of roughly 6% per year.
It is the law of supply and demand at work. With limited supply of homes and high demand from buyers, many buyers are involved in multiple offer situations with properties in local markets. This bidding will continue to keep a lid on home prices and probably continue to push them higher.
With low inventory in many local housing markets all over CA, we will probably see another 6% increase in home prices during 2017.
3. Mortgage rates will probably continue to increase in 2017
It has been a rough ride for mortgage rates since the election. As you can see below, the 30-year fixed mortgage rate increased from 3.4% in October and sits at around 4.16% today, which is roughly a 7.5% increase in mortgage payments.
A buyer who would afford $500k at the beginning of October, can now afford $462,500 using the same monthly payment today. So in just 5 months, a buyer has lost 7.5% in purchasing power.
With the new administration talking up higher spending, lower taxes, protectionist trade policies, and deregulation all adding up to inflation (inflation is the mortal enemy of bonds and low rates), the threat of all of this is causing rates to increase.
Most experts are predicting interest rates to end the year .5% higher than where they are today..
4. As Mortgage Rates Increase in 2017, Your Purchasing Power Will Fall
A question that many buyers have is, “if rates continue to rise how will this affect my affordability?”
Here is a good chart that all buyers should review, that shows the “impact of rising rates on a buyers purchasing power or affordability”.
As you can see below, if rates just increase by 1%, from 4% to 5%, a buyer will lose 10% in purchasing power. This means, if a buyer can afford to purchase $500k today, but rates increase by 1%, they will only afford $450k using the same monthly payment.
5. The Cost of Borrowing Money is Still Cheap Historically
Even though rates have increased over the past 5 months, they are still very good historically. This chart below puts current mortgage rates in perspective.
Did you know the average 30 year fixed mortgage rate over the past 40 years is roughly 8.7%, and 6.29% over the past decade!
Compare this to current rates around 4%. These current rates are still a gift, as the cost to borrow money to finance a home is still very good.
Tips for homebuyers
Bottom line, all evidence above suggests that rates and home prices are going to continue to increase over the next 12 months.
A good tip for buyers is to focus on the monthly payment and NOT the rate. Yes rates have increased over the past year and it is unfortunate, but is the monthly payment still affordable? If the payment is still affordable, do not focus on rising interest rates.
It is still a good time to buy a home, as the cost of borrowing money to finance a home is still historically very low.
Now is a good time to get out there and shop for homes. Buyers who purchase homes in the spring note there is less competition, so you can negotiate better terms with the seller.
If you have any questions about any of this information above, please feel free to contact me directly at 858-442-2686. I look forward to chatting soon!
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This entry was posted on Monday, February 27th, 2017 at 6:43 pm and is filed under 5 Reasons to Purchase a Home Soon in 2017. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.