Buying a Home in a Down Market
It's never easy to time the market for the optimal price when buying a home. If the real estate in your area is in the middle of a down market, it is normal to wonder if you should wait to buy a home. When home prices are declining, it's tempting to watch and wonder just how low they will go.
Strategies for Buying in a Down Market
Here is why you might not want to wait to buy in a down market:
- If you want to move up to a more expensive home in a down market, now could be the best time. The longer you wait to sell your home, the lower the price of that home could fall, making the more expensive home out of reach.
- If you can arrange for alternate housing, another strategy is to sell now, wait a few months to see where prices go, then buy your new home.
- If you sell and buy simultaneously, you'll still be ahead of the game because the lower price on the more expensive home is greater than the loss on the sale of yours.
Taking a Loss on Selling Your Current Home
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 10 years ago and paid $100,000. You're still ahead $170,000, less the costs of sale.
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
- That puts you $20,000 ahead, not counting the costs of sale.
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. You might not be able to afford to buy a home at any price. Here's what happens with each incremental interest increase if you're looking for a loan around $400,000:
- 1/2 point increase means $25,000 less in purchasing power.
- 1 point increase means $50,000 less in purchasing power.
- 2 point increase means $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:
- $425,000 sales price, at 4.5% interest, your payment is $2,413.
- $450,000 sales price, at 4.0% interest, your payment is $2,148.
- $475,000 sales price, at 5.5% interest, your payment is $2,697.
- $500,000 sales price, at 4.5% interest, your payment is $2,533.
- $525,000 sales price, at 3.5% interest, your payment is $2,357.
The payments are in a close range. However, the $425,000 home you may be able to afford to buy at 4.5% is $100,000 less than the $525,000 home you can afford to buy at 3.5%. 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 headlines. Make an informed decision. Run your own numbers. Talk to an experienced real estate agent who will put your interests first.