Wait vs. Buy Now?

One of the most common questions we get asked on our radio show, is…”Should we buy now, or wait a little longer?” Immediately, as good Realtors, our first reaction is “Don’t be silly! Buy Now!” But is that the right answer?

So, we did a little research into this very issue, looking for some sort of empirical evidence of this gut reaction. And we think we found it! We think you’ll agree after you read this article!

 

The Cost of Waiting Calculator

The cost of waiting to buy can easily be evaluated using the simple “Cost of Waiting” calculator provided by Samuel Scott Financial Group. Here’s the link: http://tinyurl.com/pc8rbsf .

We played with this calculator multiple times, modifying the interest rate movement, the interest rate change, and the down payment used. Here’s a typical example of what we learned…

If we assume a purchase price today of $500,000 with a down payment of 20% and an interest rate of 4.25%, the monthly mortgage payment would be $1967.76. If over the next 12 months, the value of the property increases 10% and the interest rates go up 1% to 5.25%, then the new monthly payment would be $2429.70, an increase of $461.94. Using the initial interest rate, that is a loss of $83,000 in buying power while the property values have increased 10%, or $50,000. You can try different formulas with the calculator to see how it impacts your buying power specifically.

After we played around with the calculator multiple times, we determined that a 1% increase in the value of real estate resulted in a three to 3.5% increase in payments monthly.

So if you are in a working class job, or any job that does not expect to see an increase of at least 3.5% in income for every 1% of real estate value increase, you are losing buying power and will face higher monthly payments.

 

The Median Earnings Drop

According to an article that appeared in the Council of Residential Specialists Magazine, median earnings for population of ages 18 to 34 have gone down since 1980. This group is typically from where first-time homebuyers emerge. You can see the following chart, which shows an increase in median earnings from 1980 to 2000, but then a significant drop of more than 10% in 2013.

Year

Median Earnings

1980

$35,845

1990

$36,716

2000

$37,355

2009-2013

$33,883

 

But overall during this same period, the real estate values have continued to rise, even when taking into account the market corrections of 1990, 1995, 1999 and 2008. This simple fact demonstrates that earning power is diminishing for this age group. Even if we recover to a median earning of back to the levels of 2000, we would still not be keeping up with the value increase we are seeing in real estate.

Appreciation

Using the Case–Schiller home price index, and looking at home prices from 1890 today, the average home value increased only .33% annually. However, when one applies a normal leverage to the home purchase of an 80% loan and a 20% down payment, in the equity growth in that same home is around 3% per year. Remember, this also includes the depression in the 1920s, and pre-World War II home prices, where appreciation was significantly under 5% per year.

If we look at the most recent years, i.e., from 2009-2015, we see appreciation upwards of 6% per year. In the last 12 months alone, major metropolitan areas have seen an increase as much as 10% annually in property values.

Homebuyers today constantly experience the frustration of multiple offers and being outbid for properties. The important thing to remember is that the property that sells in multiple offers, over asking price, becomes the comparable sale for the next listing. Some homebuyers have found themselves having to pay as much as 10% more for a house than they would have done only 3 to 4 months earlier.

Interest rates are rising

Given the fact that interest rates have been extremely low for the last 5 to 6 years, it’s reasonable to expect that they will be increasing at least one to 2% over the next 24 months. This further means buying power erosion for today’s homebuyer, for the same house will cost more money on a monthly basis due to interest rate increases.

Conclusion

So, the moral to the story is: BUY NOW AND DON’T WAIT. The second lesson is: BUY THE MOST HOUSE YOU CAN AFFORD TODAY.

Cliff Perotti

Producer and Host of our radio show. Cliff is a 30 year real estate veteran with experience in all aspects of residential and commercial real estate. He is the CEO/Managing Broker of Lion & Foster International, Inc., an international real estate investment and consulting firm. Cliff works with real estate brokers, developers, agents and investors alike. Simply put, he is a real estate aficionado.