Unless you've been under a rock for the past several months, you're keenly aware that interest rates have risen and done so drastically. This rate hike is the federal reserve's strategy to get supply and demand back in balance and begins to curb this inflationary cycle that we're currently in.
This move has caused a dramatic effect on buying pressure, so in one sense, it's beginning to work. This rise in interest rates has halted buyers from continuing their search because they see buying a home as a "more expensive' endeavor than it was before. I guess, in a sense, that is correct, but I would argue that you have to see this market from various perspectives.
I believe and can prove with actual data that waiting for interest rates to fall can ultimately cost you more money than buying while they're up. Let me explain.
When purchasing a home, there are several factors to consider.
- What do I qualify to buy?
- What are the interest rates?
- How competitive is the market?
- What will be the appreciation rate, both now and moving forward?
- How much upfront cash will I need to purchase the home I want?
These are not all the questions that need to be answered, but enough for us to dive in and see why waiting for rates to fall could potentially cost us thousands.
One of the fundamental advantages of owning real estate is not just having a roof over our heads or a place to call home. It is creating wealth. The bulk of our wealth lies in our real estate investment. It is, by far, the largest asset class you can own. And by virtue of appreciation, owning real estate offers the best potential to grow your wealth.
Let's take some actual numbers and work them out in a scenario to see if buying now, even with higher mortgage rates, might be the best decision you can make. I have been in the real estate industry for almost two decades now. I have weathered the crash of 07’-09' and watched it rebound to a place I've never witnessed. These last few years have been the most robust in history. More people understand the value of owning real estate and have the capacity to buy a home, and that's precisely what they're doing. This clarity flux on home ownership has created a competitive market unlike anything I've ever seen. Most analysts would argue we are in new territory related to home valuation and appreciation increases.
Supply and demand are basic economics and drive prices in every asset class. I will speak of the real estate market locally because I know it intimately. Montgomery County is a hotspot for owning real estate. Virginia Tech is the economic driver, but when you add in the VT Corporate Research Center, the Montgomery County school system, and the vast amount of tech startups MontCo has given birth to, you can quickly see why people are flocking to live in the area.
Over the last few years, the asking price of a home has just been the starting point. We have seen most home sales escalate well above the asking price. Not only have the selling prices been well north of asking, but contracts have been void of any and all contingencies. Buyers haven't been able to negotiate home inspections or the cost of potentially low appraisals. These offers have been squeaky clean because let's be honest, it's the only shot you have of landing an executed contract. Contracts cannot have one small hole in them, or guess what? You lose! I have ratified contracts as high as $83,000 over the asking price. You read that correctly. And that's because someone else offered $81,000 over, and we had no cap on our offer.
The average home has had escalation clauses between 5%-10%, and as much as 20% over the asking price. This scenario might be possible for some, but many buyers simply cannot afford that level of exposure. One of the caveats to escalating that high is that you have to cover the appraisal gap in cash. That cash-to-close can get really large in certain situations. I had one engineering client that landed the 16th offer we wrote! If you are currently in the market for a home, you understand well how difficult it is the find ONE home that you're willing to go after, let alone 16. Buyers have found themselves in positions where they are writing offers on homes that checked almost no boxes just to land an abode to call "home."
It has been a devastating market for many homebuyers, and with interest rates skyrocketing, many have bowed out and decided to rent for the next two or three years as they wait for rates to creep back down.
OK, that was a mouthful, but I felt I needed you to know that I understand what you're going through. I just bought a home myself and closed on it a few months back. Were rates higher? Yes! Here is my justification, and I think this will be true for many of you as well.
I had two options. Either I could buy a home with higher rates and less buying pressure and not have to escalate or offer my first-born to get into the house. Yeah, my rate will be higher, but not forever. Rates WILL COME BACK DOWN. It's the cyclical nature of how the federal reserve exercises its power to stimulate or slow down the economy. When they come back down, I will refinance. But looking at the numbers, it clearly made more sense to move forward now instead of waiting for rates to fall.
We are now seeing homes sit on the market when they wouldn't have lasted two days three months ago. What does this mean for you? You may be able to buy the home you want, negotiate a home inspection, keep the appraisal contingency in place, and possibly negotiate DOWN from the asking price. Here's the dollar value of that decision compared to what we've seen over the last few years.
I'm going to use a $400K purchase price for the sake of this example. It's close to the median home price in Blacksburg, so it makes sense. If you wait for rates to fall two percentage points before you buy, and you have to escalate 10% over the asking price because of the resurgence of buyers doing precisely what you've done, you'll have to pay $440K for the same home.
If you buy now at a rate of 5.5%, your monthly principal and interest payment will be $2044.00 per month. With 10% down and including closing costs, your Out-of-pocket expenses will be roughly $50K.
If you wait for rates to fall to 3.5%, and let's say it takes two years for that to happen, and you have to escalate 10% to compete, you'll be bringing $90,000 cash to close. Your payment will be $428.00 per month cheaper. If you divide the difference of your cash to close by that $428.00, it will take you 93 months or 7.7 years to make up the difference. But to buy that home now and refinance in two years when rates fall will only cost you an additional $10,272. That's almost a 75% savings. But wait, you need to consider a few more IMPORTANT things.
That $400,000 house in two years will no longer be $400,000. Let's be conservative and say that home prices will appreciate a meager 5% per year for the next few years until rates come back down; that $400K house is now $441,000. That means your payment will be $1782.00 per month, which is only $262.00 per month less than buying it now. The principal amount is now $41,000 higher; you cannot adjust that. Not to mention, you just gave up $41,000 in appreciation that YOU could've realized had you bought sooner rather than later. Add that to your additional cash-to-close, and now you're in the hole $81,000.
Many buyers will understand the binary choice of buy now or wait and its overall effect on their wealth generation. Those armed with the knowledge of each decision will undoubtedly stay in the market and refinance down the road. Buying now and refinancing in two years will leave you with a smaller fixed mortgage than waiting it out. I know on its face, waiting to purchase with lower rates sounds like a better plan, but the numbers tell a different story.
Don't wait! Even with a slowing housing economy, prices will still push north, and it WILL cost you more money down the road. I'll be happy to help you navigate the waters and find the home you've been dreaming of, and in the end, you'll be the one smiling.
1344 N Main St Blacksburg, VA