Anna Child Group
Waiting to purchase a home could be costly for buyers and move-up sellers
With minimal expected appreciation in 2014 compared to prior years, the sense of urgency to buy is not as prevalent. Instead, many potential buyers are taking their time or putting off purchasing to a later date. This is not necessarily a sound strategy with interest rates forecasted to increase about one-percent compared to where they are today by year’s end.
It is not a matter of “if” interest rates will go up; it is “when” they will go up. They have been held at artificially low levels thanks to the Federal Reserve dumping money into the financial system and keeping the discount rate at an extremely low level for quite some time. The net effect of taking this action for years is increasing pressure for rates to rise. Economically, it is inevitable that interest rates will rise.
Considering that rates will climb, the impact on monthly payments cannot be ignored. For a buyer that is looking to purchase a $600,000 home with 20% down, the monthly payment would rise by an additional $291 per month with a 1% increase in interest rates. To drive home the point further, if a buyer qualifies for the $2,397 payment, that’s a purchase price of $600,000 today. When interest rates climb by just one-percent, that same payment allows a buyer to purchase a $535,000 home, $65,000 less than today. Rising rates erode purchasing power and affordability drops.
As the price range rises, the difference is even more profound. For a buyer that qualifies for a $3,994 monthly mortgage payment, that’s a purchase price of $1,000,000 today. When interest rates rise by one-percent, a buyer will be looking at a $891,625 home, a difference of nearly $110,000. That is a lot less home.
Home values in Orange County are not going down.
Waiting to buy does not make economic sense. Instead, buyers that wait are throwing away hundreds of dollars every single month because rising rates are inevitable. In June of last year, Bernanke and the Federal Reserve announced that they were going to start to reduce the amount of money they dumped into the monetary system every month, also known as tapering. Immediately, interest rates shot up by one-percent. Buyers that did not lock were looking at an instant increase in their monthly payment. These increases are just the beginning. Interest rates prior to the downturn were at 6.4%. They dropped after the Federal Reserve intervened. The Fed is now strategically moving the other direction and interest rates will rise.
For the homeowner who is looking to move up in value, waiting to make the move really does not make any sense at all. Many would like to wait for their homes to appreciate in value before they pull the trigger on selling. Not only are they looking at eroding purchase power with a rise in rates, they are looking to pay more as well. 10% appreciation in a $750,000 home is an additional $75,000. For a $1 million home, it is an additional $100,000. The appreciation rate may be the same, but the net result is additional equity for higher priced homes.
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