The High Cost of Waiting

Financing

The Fed has spoken, the projections are in, and, I’m sorry to say, if you have decided to WAIT to buy your home (to save more money, for prices to come down, for the market to cool off and behave more sanely … for whatever reason …), you might want to think again.

Even with the big surprise in real estate news: the fact that San Francisco-Oakland no longer tops the list of the hottest housing markets in the US, it’s already clear that no matter how you slice it, it will cost significantly more to buy (and own) a home LATER than it costs TODAY.

San Francisco-Oakland dropped to 37 out of the 100 “hottest markets” in 2017, due primarily to low inventory. Yet price increases here are projected to continue to lead the nation. Realtor.com projects 8+% in price increases over the next year for the Bay Area as a whole. (Nationwide, the increase in home prices is projected to be 5.4%.) Combine that with a rising interest rate environment (from 4.25% today to up to 5% by year’s end), and it’s like a compound effect.

With the spring market rapidly taking shape, I wanted you to see just HOW MUCH MORE the double whammy of increasing prices PLUS increasing rates can cost if you decide to wait. (see attached and below)

 For perspective: Demand for housing here is NOT easing. Every city in Alameda County saw increased average and median sales prices for single family homes in 2016 over 2015 (except Emeryville, where only three single families actually sold). Oakland, Alameda and Richmond led the pack with 10% increases in median values. The smallest increase in single family median value was 6% -- in Albany. Condo sales were even hotter: Sold prices for condos in Oakland and Berkeley were up 15% year-over-year. Also mentionable: Berkeley now holds the onorous position as the top market in the country for homes selling OVER asking price – with over 90% of sales closing above asking. (usually by a factor of about 10%, but in coveted neighborhoods, by as much as 30% in multiple bidding situations.)

Today, a pre-approved buyer with a 20% down payment taking a conventional mortgage (borrowing up to $635,000 in most Bay Area locations), can expect about 4.25% interest right now. With the average sale price in Berkeley now topping $1 million, it’s easy to expect a great many people in purchases of at least $750,000 … with a typical payment today of about $3800. (including Principal, Interest, Taxes and Insurance).  By year-end, many economists predict we’ll hit or even exceed 5%. And the house payment on the same loan amount would go to $4100. But to buy the same house with an 8% price increase, you’d also have to FIND or FINANCE the additional $70,000 in price!

At the same time, as interest rates rise, another favored aspect of buying a home with a mortgage diminishes. With a higher interest rate, the portion of your payment going toward interest payoff increases, and the portion assigned to PAY YOURSELF in equity growth decreases. On a typical-for-Berkeley $1 million purchase, using a normal 30-year amortization, you pay yourself $140 LESS each month in equity growth at 5% than you would have paid at today’s 4.25%.

Bottom line: waiting, even for a few months, equals NOT ONLY overall higher prices, but EXPONENTIALLY higher dollars paid in mortgage expenses – each month, and over a period of years, adding up to many tens of thousands. (On that $1 million purchase ($800,000 mortgage) that’s up to $6000 more each year, $60,000 over 10 years, and so on.

 Never one to want to leave you on a sour note, though, there is always a silver lining. The only upside I see here is: Most people who itemize their deductions when preparing income tax return are able to deduct both the mortgage interest on a primary residence and their property taxes. As you can see in the chart … with increasing mortgage interest rates, paying more in interest should enable you to deduct that much more from your taxable income. (Always consult a tax advisor … I’m not one!)

Whether the right time for you is now, or later, I’d be happy to work hard to help you find and win an offer on the right home (or condo) for you. Trust me to keep on top of the trends – and the strategies – to make it work for you, whatever the circumstances when your time to buy comes.