Why Waiting to Buy a Home Could Cost You a Small Fortune
Many people are sitting on the fence trying to decide if now’s the time to buy a home. Some are renters who have a strong desire to become homeowners but are unsure if buying right now makes sense. Others may be homeowners who are realizing that their current home no longer fits their changing needs. To determine if they should buy now or wait another year, they both need to ask two simple questions: Do I think home values will be higher a year from now?Do I think mortgage rates will be higher a year from now? Let’s shed some light on the answers to these questions. Where will home prices be a year from now? If you average the most recent projections from the major industry forecasters, the expectation is home prices will increase by 7.7%. Let’s take a house that’s valued today at $325,000 as an example. If the buyer makes a 10% down payment ($32,500), they’ll end up borrowing $292,500 for their mortgage. Applying the projected rate of home price appreciation, that same house will cost $350,025 next year. With a 10% down payment ($35,003), they’d then have to borrow $315,022. Therefore, as a result of rising home prices alone, a prospective buyer will have to put down an additional $2,503 and borrow an additional $22,523 just for waiting a year to make their move. Where will mortgage rates be a year from now? Today, mortgage rates are hovering around 3%. However, most experts believe they’ll rise as the economy continues to recover. Any increase in the mortgage rate will also increase a purchaser’s cost. Here are the forecasts for the first quarter of 2022 from four major entities: Freddie Mac – 3.5%Fannie Mae – 3.5%National Association of Realtors – 3.5%Mortgage Bankers Association – 3.9% The projections average out to 3.6% among these four forecasts, a jump up from where they are today. What does it mean to you if home values and mortgage rates increase? A buyer will pay a lot more in mortgage payments each month if both of these variables increase. Assuming a buyer purchases a $325,000 home this year with a 30-year fixed-rate loan at 3% after making a 10% down payment, their monthly principal and interest payment would be $1,233. That same home one year from now could be $350,025, and the mortgage rate could be 3.6% (based on the industry forecasts mentioned above). That monthly principal and interest payment, after putting down 10%, totals $1,432. The difference in the monthly mortgage payment would be $199. That’s $2,388 more per year and $71,640 over the life of the loan. Add to that the approximately $25,000 a house with a similar value would build in home equity this year as a result of home price appreciation, and the total net worth increase a purchaser could gain by buying this year is nearly $100,000. That’s a small fortune. Bottom Line When asking if they should buy a home, many potential buyers think of the nonfinancial benefits of owning a home. When asking when to buy, the financial benefits make it clear that doing so now is much more advantageous than waiting until next year.
Patience Is the Key to Buying a Home This Year
The question many homebuyers are facing this year is, “Why is it so hard to find a house?” We’re in the ultimate sellers’ market, which means real estate is ultra-competitive for buyers right now. The National Association of Realtors (NAR) notes homes are getting an average of 4.8 offers per sale, and that number keeps rising. Why? It’s because there are so few houses for sale. Low inventory in the housing market isn’t new, but it’s becoming more challenging to navigate. Danielle Hale, Chief Economist at realtor.com, explains: “The housing market is still relatively under supplied, and buyers can’t buy what’s not for sale. Relative to what we saw in 2017 to 2019, March 2021 was still roughly 117,000 new listings lower, adding to the pre-existing early-year gap of more than 200,000 fresh listings that would typically have come to market in January or February. Despite this week’s gain from a year ago, we’re 19 percent below the new seller activity that we saw in the same week in 2019.” While many homeowners paused their plans to sell during the height of the pandemic, this isn’t the main cause of today’s huge gap between supply and demand. Sam Khater, Vice President and Chief Economist at Freddie Mac, Economic Housing and Research Division, shares: “The main driver of the housing shortfall has been the long-term decline in the construction of single-family homes . . . That decline has resulted in the decrease in supply of entry-level single-family homes or, ’starter homes.’” When you consider the number of homes built in the U.S. by decade, the serious lack of new construction is clear (See graph below):The number of newly built homes is disproportionately lower than the rate of household formation, which, according to the U.S. Census Bureau, has continued to increase. Khater also explains: “Even before the COVID-19 pandemic and current recession, the housing market was facing a substantial supply shortage and that deficit has grown. In 2018, we estimated that there was a housing supply shortage of approximately 2.5 million units, meaning that the U.S. economy was about 2.5 million units below what was needed to match long-term demand. Using the same methodology, we estimate that the housing shortage increased to 3.8 million units by the end of 2020. A continued increase in a housing shortage is extremely unusual; typically in a recession, housing demand declines and supply rises, causing inventory to rise above the long-term trend.” To catch up to current demand, Freddie Mac estimates we need to build almost four million homes. The good news is builders are working hard to get us there. The U.S. Census Bureau also states: “Privately-owned housing units authorized by building permits in March were at a seasonally adjusted annual rate of 1,766,000. This is 2.7 percent (±1.7 percent) above the revised February rate of 1,720,000 . . . Privately-owned housing starts in March were at a seasonally adjusted annual rate of 1,739,000. This is 19.4 percent (±13.7 percent) above the revised February estimate of 1,457,000. . . .” What does this mean? Lawrence Yun, Chief Economist at NAR, clarifies: “The March figure of 1.74 million housing starts is the highest in 14 years. Both single-family units and multifamily units ramped up. After 13 straight years of underproduction – the chief cause for today’s inventory shortage – this construction boom needs to last for at least three years to make up for the part shortfall. As trade-up buyers purchase newly constructed homes, their prior homes will show up in MLSs, and hence, more choices for consumers. Housing starts to housing completion could be 4 to 8 months, so be patient with the improvement to inventory. In the meantime, construction workers deserve cheers.” Bottom Line If you’re planning to buy this year, the key to success will be patience, given today’s low inventory environment. Let’s connect today to talk more about what’s happening in our area.
Planning to Move? You Can Still Secure a Low Mortgage Rate on Your Next Home
This year, mortgage rates have started to slowly climb above recent record-breaking lows. Many homeowners planning to move may feel like they’ve missed the chance to score a great rate on their next mortgage. In reality, there’s still time to secure a rate far below the historic norm. Here’s why. After creeping up for seven consecutive weeks, average mortgage rates have dropped more recently (See graph below). With rates taking a slight dip over the past two weeks at the same time the inventory of houses for sale is so low, homeowners today are sitting in the optimal seat to sell. What’s the advantage of selling your house now? Securing a low mortgage rate on your next home.To take advantage of today’s real estate market, experts are encouraging homeowners to act now before interest rates climb. Danielle Hale, Chief Economist at realtor.com, explains: “…mortgage rates slid for a second week … but we don’t expect rates to stay at this level for too long.” Hale continues to say: “For sellers, getting in early optimizes odds of a quick sale at a good price before there’s too much competition, but that means acting now … In this environment, sellers probably really can’t go wrong, and that’s especially true in the nation’s hottest housing markets where homes are selling quickly and getting the greatest number of viewers online.” Most experts agree that rates will continue to trend upward. Sam Khater, Chief Economist at Freddie Mac, states: “Despite the pause in mortgage rates recently, we expect them to increase modestly for the remainder of this year.” In addition, Freddie Mac recently released their Quarterly Forecast, which notes: “We forecast that mortgage rates will continue to rise through the end of next year. We estimate the 30-year fixed mortgage rate will average 3.4% in the fourth quarter of 2021, rising to 3.8% in the fourth quarter of 2022.” (See graph below): While buyers everywhere want to secure the lowest rate possible, it’s important to remember that today’s rates are still much lower than the historic norm. Odeta Kushi, Deputy Chief Economist at First American, emphasizes: “While mortgage rates have trended up in recent months, they are still historically low, so relative to one year ago, housing actually is still more affordable and that’s really thanks to this low mortgage rate environment we find ourselves in.” Bottom Line If you’re thinking of moving, don’t miss the opportunity to score a great rate on your next home mortgage. Let’s connect today so you can get your house ready to sell and find your dream home while mortgage rates are still low.
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