Cost of Waiting

THINKING ABOUT WAITING TO PURCHASE? 
You tell yourself - “I know we are at the top of the market and values are going to drop. Why, with all the turmoil in Europe, rising interest rates, and increasing inflation, how could I be wrong? How long can values continue to rise?”

Just like the stock market, trying to time the real estate market can be very risky business. But, unlike a stock, this is your home-an “investment” your going to have and enjoy for a very long time. The intangible and immeasurable pleasure and enjoyment we get from the experiences of homeownership pales in comparison to other purely financial investments we keep in our file cabinet or held in the Cloud for us.  Have you tried curling up around the fireplace with your stock portfolio lately?

SO, SHOULD YOU WAIT? 
If you believe we are in for a market correction, will the correction be enough to offset what we do know to be the case—rising interest rates and strong demand will likely continue. While the market may be demonstrating some uncertainty at the present, can we with confidence conclude that the market will reset? And if so, are you savvy enough to know how much of a reset and just as importantly, time exactly when to get back in? 
Let’s demonstrate this with a simple example of a home purchase and a few (we think) conservative sets of facts to answer the question:  “Should I buy now or wait 1 year?”  Spoiler alert—Don’t wait. 

Purchase price $650,000, 20% down, 30-year loan, interest rate today 5% increasing to 6% if we wait 1 year. We will assume a 5 year holding period and no appreciation for the next 6 months and only a 2.5% increase over the first year. We will then assume a moderate 5% increase year over year for the 5-year holding period. The future value of our $650,000 home in 5 years at these rates of appreciation will be $809,831. The loan balances at the end of 5 years is different in each case as the interest rates are different depending on whether you purchase now or wait (5% vs. 6%) and the time to amortize is shorter for the person who waits out the year. The person who waits also has to pay more for their home and also has to pay more in a down payment. 

Assuming the above, the net cost of waiting is $18,738. This increased cost results from:

•     higher down payment for the person who waited ($3250)
•     less amortization with the higher interest rate mortgage ($15,488)

We believe the above analysis is very conservative, especially for our market area. The risk of higher interest rates is real, inventory is at an all-time low, and demand still remains very strong with the continued influx of new residents from large market areas like New York, Chicago, Philadelphia, Miami, etc. and new market participants such as millennials— both of which will continue to be present in our marketplace. 

BOTTOM LINE
Probably not a very good idea to wait.