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. So far in 2018, both interest rates and home prices have continued to increase. If rates continue to increase 1% higher from where they are today, a buyer who can afford to purchase $800,000 today, will only be able to afford $714,000 using the same monthly payment, which is a loss of 10.75% in purchasing power.
Why Interest Rates Will Continue to Increase
It looks like rates are going to continue to move higher again over the next few months, as the technical trading signals are growing louder and more dangerous.
With every moment that the 10-Year Treasury remains above the 2.95% technical level (see chart below), it is looking likely that rates have turned 2018’s previous ceiling into a floor.
This means the 10-Year Treasury is probably going to increase to the next technical trading level of around 3.35%, which will increase the 30-year mortgage rate another “.30” from current levels. The 30-year mortgage rate follows the direction of the 10-Year Treasury.
This means we are looking at 5% interest rates soon. If you know of any buyers who have been putting off a home purchase, let them know their interest rate is probably going to increase as each month goes by.
The Impact of Higher Rates on Buyer Purchasing Power
A question that many buyers ask is, “If rates 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, if rates just increase by 1%, from current levels of 4.5% to 5.5%, a buyer will lose 10.75% in purchasing power.
This means, if a buyer can afford to purchase $600k today, but rates increase by 1%, they will only be able to afford $535,500 using the same monthly payment.
If a buyer can afford to purchase $800k today, but rates increase by 1%, they will only be able to afford $714,000 using the same monthly payment.
If a buyer can afford to purchase $1,000,000 today, but rates increase by 1%, they will only be able to afford $892,500 using the same monthly payment.
The Cost of Waiting to Buy a $750k Home
Here is an example below of the potential extra cost for waiting to buy a $750k home, if both rates and home prices continue to increase.
As of today, if a buyer pays a point they will be able to buy down the rate to 4.02%.
But if rates increase to 4.80% and the home price increases by 5% over the next 12 months, 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. Therefore the cost of waiting to buy this home could cost an extra $193,680.
The Cost of Waiting to Buy a $250k Home
Here is another example below of the potential extra cost for waiting to buy a $250k home, if both rates and home prices continue to increase.
As of today, if a buyer pays a point they will be able to buy down the rate to 4.3%.
But if rates increase to 5.1% and the home price increases by another 4% over the next 12 months, the monthly payment will increase from $1,237 to $1,415, which is an increase of $178 a month.
This amounts to an extra $2,136 annually, and $164,080 over the life of the loan. Therefore the cost of waiting to buy this home could cost an extra $64,080.
The Cost of Borrowing Money is Still Cheap Historically
When compared to rates historically, current rates are still very cheap. 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 4.5%. As rates are going to continue to increase, current rates are still a gift to anyone looking to borrow money to finance a home.
Tips for homebuyers
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.
It is a great time to get out there and shop for homes. We are entering the summer months soon, which means there will be more inventory available.
I tell my buyers not to focus on rising rates or home prices. Find a home that you love and that you can afford for your family.
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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