The “Cost of Waiting to Buy” is defined as the additional funds it would take to buy a home if home prices and interest rates were to continue to increase over the next 12 months. Mortgage rates have already increased “.5%” since the New Tax Bill was passed in December and are now at 3 year highs. Did you know that just a “.5%” increase in rates reduces a buyers purchasing power by 5%, which means a buyer being able to afford a $570k home instead of a $600k home with the same monthly payment. Here are 5 reasons to purchase a home soon in 2018.
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. The “Cost of Waiting to Buy” is defined as the additional funds it would take to buy a home if home prices and interest rates were to continue to increase over the next 12 months.
This example below is for a $750k purchase. It shows the additional funds it would take to buy a home if rates increase from 4.02% to 4.80%, and the home price increased by 5% from $750k to $786,750.
The monthly payment will increase from $3,589 to $4,127, which is an increase of $538 a month.
This amounts to an extra $6,456 annually, and $193,680 over the life of the loan.
That means a buyer who waits a year to purchase a home, could pay an additional $193,680 in interest and payments over the life of the loan to purchase the same home.
2. Mortgage rates will continue to rise in 2018
It has been a rough ride for mortgage rates since the New Tax Bill passed, see below. Rates have already increased by “.5%” in just the past month and are trading at 3 year highs.
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), all of this is causing rates to increase.
The 10-year Treasury is one of the main drivers for the direction of long term rates. The 30-year fixed mortgage rate follows the direction of the 10-year Treasury.
As you can see below, the 10-year Treasury has broken through several ceilings of resistance over the past month, and is approaching 5 year highs around 3% from back in 2013.
If the 10-year Treasury continues to move towards 3%, it means 30-year fixed mortgage rates are going to increase another “.25%” from current levels.
If you or someone you know is planning on buying a home in 2018, or looking to refinance, it would be a good idea to try and lock in a rate soon as the current trend is for rates to continue moving higher.
3. As Mortgage Rates increase in 2018, buyer 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 below that all buyers should review, that shows the “impact of rising rates on a buyers purchasing power or affordability”.
As you can see on the chart, when rates increase by just “.5%”, a buyer loses 5% in purchasing power.
For example, see how the payment at the 4% rate on a $400k loan, is roughly the same payment as the 4.5% loan at $380k, a loss of 5% in purchasing power for a buyer.
If rates increase by 1%, from 4% to 5%, a buyer will lose 10% in purchasing power. This means, if a buyer can afford to purchase $600k today, but rates increase by 1%, they will only afford $540k using the same monthly payment.
4. Home Prices will probably continue to rise in 2018
Many housing experts are predicting home prices will continue to increase in 2018, and increase around 5% for most markets in California.
2018 will probably play out the same as 2017 for many California markets, where limited inventory and strong demand for homes will continue to push purchase home prices higher.
The San Diego County median home price finished 2017 at one of its highest points. The median home price was $540,000 in December, tied for second-highest of the year, capping off a year of record price gains, said real estate tracker CoreLogic.
In 12 months during 2017, the median price in San Diego increased 9.1%, outpacing the 4.2% yearly increase in 2016.
One thing to keep an eye on is the effects of the new tax law. The new tax law caps the mortgage interest deduction and the deductibility of state and local taxes, so this may impact the upper-end market in 2018. Precisely how and the extent of which remain to be seen.
5. The cost of borrowing Money is still cheap historically
Even though rates have increased over the past month and look like they will continue moving higher in 2018, the current cost of borrowing money to finance a home is still low when compared 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!
Share this chart with anyone who thinks current rates around 4% are too high. Current rates are still a gift and should be taken advantage of by anyone looking to borrow money to finance a home.
Who knows how high rates will move over the next few years. They certainly cannot stay this low forever and will one day revert to their mean.
Tips for Homebuyers
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 been increasing recently, but is the monthly payment still affordable? If the payment is still affordable, do not focus on rising interest rates.
This time of year is also a great time to get out there and shop for homes. Buyers who purchase homes in the spring always note there is less competition, so you can negotiate better terms with the seller.
If you have any questions about getting approved for financing, please feel free to contact me directly at 858-442-2686. I look forward to chatting soon!
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