Buying a Home in a Down Market
If your real estate market is in the middle of a down market, it is normal to wonder if you should wait to buy a home. Everybody wants to know how to best time the market when buying a home. It's just natural. Especially if you're thinking about buying in a down market where homes prices are declining. It is normal to wonder how low they will go and whether you should wait.
Downsides of Buying
You're probably thinking a Realtor will always say "Now is the best time to buy." Well, here is why you might not want to wait to buy in a down market.
- If you are a seller who wants to move up to a more expensive home in a down market, now could be the best time. The longer you wait to sell, the lower the price of your home could fall.
- If you can arrange for alternate housing, a smart strategy is to sell now, wait a few months, then buy your new home when you do not have a contingent offer.
- If you sell and buy simultaneously, you'll still be ahead of the game because the price reduction on the purchase is greater than the loss on the sale.
Taking a Loss on Selling Your Current Home
For example, say your present house is worth $300,000, but because of high inventory and few buyers, you must reduce your price by 10%. So, instead of receiving $300,000, you would get $270,000 and "lose" $30,000.
Real Profits and Savings
Now, consider this. Say you bought this home ten years ago and paid $100,000. You're still ahead $170,000, less the costs of sale, aren't you? (This ignores monthly mortgage payments, but you would make those if you were renting, too.)
If you are planning to move up to a $500,000 house, which is located in the same distressed market, you could probably buy that house at that same 10% discount or $450,000. It would mean you had saved $50,000.
Review of Selling and Buying Numbers
- So you "lost" $30,000 on the sale of your home
- But you "made" $50,000 on the purchase of your new home
- Doesn't that put you $20,000 ahead?
The Impact of Interest Rates
Which way are interest rates moving? Are they moving up or moving down? If interest rates are near an all-time low and beginning to inch upwards, waiting could cost you more than you would think. You might not be able to afford to buy a home at any price. Following is what happens if you're looking for a loan around $400,000.
- FACT: Each 1/2 point increase in your interest rate gives you $25,000 less in purchasing power.
- FACT: Each 1 point increase in your interest rate gives you $50,000 less in purchasing power.
- FACT: Each 2 point increase in your interest rate gives you $100,000 less in purchasing power.
Purchase Prices vs. Interest Rates
If you put down 20% and qualify for an 80% conventional loan, here are your principal and interest payments on the following purchase prices:
The payments are almost identical. However, the home you can afford to buy at 8.25% is $100,000 less than the home you can afford to buy at 6.25%. If you wait for prices to decline further, the perceived value could be lost due to higher rates.
A good strategy is to weigh all the pros and cons of real estate ownership before making the decision to buy or sell. Don't panic over newspaper headlines. Make an informed decision. Run your own numbers. Talk to an experienced real estate agent who will put your interests first.
- $425,000 sales price, at 8.25% interest, your payment is $2,554.
- $450,000 sales price, at 7.75% interest, your payment is $2,579.
- $475,000 sales price, at 7.25% interest, your payment is $2,592.
- $500,000 sales price, at 6.75% interest, your payment is $2,594.
- $525,000 sales price, at 6.25% interest, your payment is $2,586.
At the time of writing, Elizabeth Weintraub, CalBRE #00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.