If you are a first time buyer who has been trying to decide whether to buy your first home or not, it’s time to buy now. If you miss this great opportunity, you may regret it for the rest of your life.
Interest rates are close to all time lows, hovering in the mid-five percent range. When I started in the real estate business in 1978, interest rates were 9 ¾ percent and soon hit 10 percent. In the downturn in the 1980s, they jumped as high as 21 percent. In the early 1990’s, they were at 12 percent. If you’re waiting because you think prices may drop more, don’t. With the government running huge deficits, they will have to sell treasury bills to cover the debt. Investors are feeling skittish about purchasing these securities. This means the government will have to increase the rate of return in order to get more investors to purchase. When the government increases these rates, the cost of home mortgages increases along with them.
One of the concerns almost all first-time buyers have is, “Will the price go down further?” To put this in perspective, an interest rate increase of one percent on a $200,000 loan will cost you approximately $50,000 more in interest over the life of the loan. A two percent interest rate increase, which many experts believe is possible in the next 12 to 24 months, will cost you approximately $100,000 in additional interest over the life of a 30-year loan. That’s a whopping 50 percent of the loan amount. If you believe prices will go down, the question is by how much? If you believe there is another 25 to 50 percent depreciation in your marketplace, then you can run the risk of waiting. What you need to know, however, is that virtually all real estate experts are saying that we are at or very near the bottom.
Proof that prices are bottoming is coming from a wide variety of places. Many of the hardest hit areas are beginning to make a comeback. Sales in California are up by 20 percent. Two major condominium buildings in Miami sold out in just six weeks. While these examples don’t represent a complete turnaround, they are concrete signs that the market is bottoming right now or may be starting to improve. In terms of how market cycles work, the excess inventory must be sold off prior to the market stabilizing in terms of price. This appears to be what is happening in many areas. Once the excess inventory disappears, you will have more competition for a limited amount of supply. This is how the next upturn in the market will begin. In fact, many first time buyers in Orange County, California are bumping into multiple offers on the homes they want. Multiple offers on first-time buyer properties are one of the sure signs that the market is improving.
Assume that you are currently paying $1,500 per month rent. You would like to buy a $300,000 property with $30,000 down and a $270,000 loan for 30 years at 6¼ percent. You are in the 28 percent tax bracket and will own the property for 8 years. Appreciation only keeps pace with inflation at 2.54 percent per year. The estimated cost of renting is $142,015 vs. the estimated cost of buying which is $117,754. You save $24,261 by purchasing rather than renting. (You can use any of the online rent vs. buy calculators to make this determination for your situation.)
Another challenge with renting is that you are paying off your landlord’s mortgage, not your own. Even if your house doesn’t increase in value, each month you make a payment, you accumulate wealth by paying down the principle. This is the equivalent of putting money in the bank each month. In contrast, renters lose additional wealth as their rental payments increase over time. Homeowners with a fixed rate loan have locked in their mortgage amount for the next 30 years. If there is inflation, the homeowners pay off their loan with inflated dollars. Rents, in contrast, keep pace with inflation.
Thus, if you elect to wait to purchase, you may be leaving money on the table in two different ways. First, if the interest rates increase, you will end up paying more over the term of their loan. Second, by waiting to take action, you will accumulate less wealth and experience less appreciation. Furthermore, the longer you wait to start paying down a mortgage, the later the date will be that you retire that debt.