The Kristoff Team

Wait or Buy Now in this market? Let's do the math! (Video)

Wait or Buy Now in this market? Let's do the math! (Video)

I wanted to provide a quick update for you today to answer a question that I've been getting a lot of lately: "Should I wait to buy? Interest rates are at 20-year highs, should I wait to purchase the home because rates are so high?"

I wanted to give you some insight because on Sept. 8, 2023 the Wall Street Journal put out an article (I put a link here), but they put out an article with the headline "The Fall in Home Prices May Already Be Over: Quick recovery in prices suggests housing downturn could be shorter, shallower than expected."

For many of you this is what you're expecting, but it is key that the Wall Street Journal is now sharing this information with the broader public and, in particular, there was a quote in here that really jumped out: "a panel of more than 100 economists and housing analysts surveyed by Pulsonomics in March [2023] expected home values to fall about 2% year over year. When surveyed in August the panel predicted that prices would rise 3.3% this year instead."

That is a pretty significant reversal in their expectation of where home values are and its driven by the thing we all know, that is a shortage of inventory. The key part I wanted to share with you today is just some basic math as it relates to mortgage loans. Not opinions on the market just taking the information in the article and doing some quick back of the envelope calculations to show where the break-even point is and why it may not make sense to wait from a purely mathematical standpoint.

$500,000 home price today
3.3% year-over-year appreciation (from the WSJ article)

Let's assume a buyer is getting a $400,000 mortgage today (80% loan)
10% Worst Case Scenario Interest Rate (Let's take a very high current interest rate for the sake of this example)
5% Future interest rate in one year (let's take a very low interest rate in a year. Essentially, we're assuming a 5% drop in mortgage rates in 1 year...pretty extreme!)

Let's answer the question: If prices will go up 3.3% in a year, but rates will drop 5% in a year, should I wait or should I buy now?

First, what will be the home price in 1 year?
$516,500 home price one year from now based on 3.3% appreciation

Second, what is the difference between today's home price and the home price in 1 year?
$16,500 (an increase of $16,500)

Third, what is the mortgage payment of $400,000 at 10%?
$3510.29 per month

Fourth, what is the mortgage payment of $400,000 at 5%?
$2,147.29 per month

Fifth, what is the difference between the two payments?
$1363.00 per month ($1363 x 12 = $16,356 per year!)

The home appreciation is $16,500 with just that 3.3% appreciation in the actual home value so the break-even point is just one year if you were to buy it today at 10% and rates were to fall to still come out ahead.

You can multiply this scenario out to a $1,000,000 home or 1,500,000 home and see that these numbers get even more magnified. The example here is really just to show that if you were looking at whether to wait or buy then the money is going to be made or lost on the home purchase, not the mortgage rate. Buying the right home in a market that is appreciating will almost always come out ahead regardless of the interest rate. Furthermore, the interest rate is a temporary component. If rates do drop back to 5% then refinancing the mortgage is always a possibility.

Reach out to The Kristoff Team if you'd like us to run the math for your scenario.

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