DEVASTATED BORROWER LOSES $75,000 OF PURCHASE POWER
A pre-approved buyer of ours is devastated because he lost $75,000 of purchase power, despite getting a raise, and is now priced out of his desired market.
This is a result of two things: (1) higher rates; and (2) waiting months to make offers.
Yesterday’s blog discussed the impossibility of timing the market, and today’s is hitting a related issue: the cost of waiting to make offers.
There are two huge potential costs associated with waiting: (1) Higher rates and higher payments; and (2) Appreciation.
And yes, I realize that prices could fall too, but there is no way of knowing if or when that will happen, as per yesterday’s blog.
And – the trend is still going in the higher rates and appreciation direction.
COST OF WAITING TO BUY IN 2013
I share this story often in my blogs, as it epitomizes the cost of waiting.
In 2013, we had a borrower looking to buy in Oakland, CA and she was obsessed with getting the absolute lowest possible price.
As a result, she kept walking away from transactions because of $5,000 to $10,000 price discrepancies, even though she was shopping in the $650,000 range in what was becoming the hottest market in the country.
The $10,000 differences she quibbled over worked out to be less than $50 per month in payment. What is most interesting is that she waited so long that she was ultimately unable to buy in her desired neighborhood altogether, and she ended up buying in a less desirable suburb.
What is more interesting is that the houses she was bidding on are now worth well over $2 million because her original neighborhood (known as “Rockridge”) remains one of the most desirable areas in the entire country.
COST OF WAITING TO BUY IN 2022
As I mentioned above, there are two potential costs: (1) Higher Rates and Payments; (2) Appreciation.
1) Rates continue to rise.
Rates continue to rise, and as I explain in this blog – Impact of Higher Rates on Payments – a 1/2% increase in rates adds about $150 to the monthly payment of a $500,000 mortgage, or $300ish to a $1 million mortgage.
2) Appreciation remains hot, despite higher rates.
CoreLogic recently reported that appreciation for the month of March was 3.3%, and 21% year-over-year.
And – they are forecasting 6% for the following year.
Keep in mind too that CoreLogic forecasted 3.5% appreciation for last year, a bit under the actual 21% 😊, so they tend to be a bit conservative.
Anyway, if a buyer in the $500,000 range waits until next spring to buy, she will likely have to pay at least $30,000 more for the same home (per CoreLogic’s forecast).
If we continue with current trends though, she could end up paying $100,000 more.
BUT – WHAT IF RATES FALL AFTER SOMEONE BUYS? Borrowers can just refinance at no cost in most cases.
BUT – WHAT IF HOME VALUES FALL AFTER SOMEONE BUYS? Borrowers should be like Warren Buffett and “buy and hold” because they will lose nothing if they don’t sell, as per yesterday’s blog. They can also refinance, as the conditions that would portend lower home values will also very likely result in lower rates.
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