The Pandemic Conundrum: Buy Now or Wait and See
Consumers are familiar with the phrase “buy low, sell high”, which is commonly used in conjunction with investing, such as in the stock market or within other investment frameworks. Most investors also understand the power of buying an asset at a discount. Retailers have been using discounts for centuries to lure potential buyers.
However, the issue most new buyers face is deciding the inflection point where an asset goes from premium to fair to discounted pricing. In fact, most buyers aren’t aware that there are other factors at play worth considering.
The housing market in particular has new home buyers and savvy investors swooning due to the low mortgage interest rate environment. But many buyers are unsure exactly what the optimal time is to commit to a new purchase.
Like other consumers, many are looking to see if the market rates will drop again despite rates being at near record lows.
Freddie Mac recently reported that over the last 45 years rates have ranged from 18.63% to 3.31%, with rates on a declining trajectory since the early 2000’s. In fact, the 30-year fixed mortgage fell to a record low at 2.98% in July.
Buyers will continue to ask if rates drop again or is now a good time to buy. Overall, there are several reasons to buy now as opposed to waiting for changes that could ultimately result in missed opportunities.
Reasons Why You Should Buy Now
Regardless of what you think the market may or may not do, the argument remains that there probably is no better time to buy a new home.
Here are some reasons why even amidst COVID-19, diving in rather than waiting to react to the market may be the better approach.
Property Values Are Increasing
Since price is always a primary factor when making any purchase, let’s start there. The bottom line is that home prices are continuing to rise.
Forbes notes that statistically, current median listing prices are about 5.6% higher than they were a year ago. Compared to the interest rate trends reported by Freddie Mac, house prices have actually doubled since the early 2000’s.
This means that buyers looking to time the market may find it difficult to “buy low”. Furthermore, as the U.S. economy continues to battle COVID-19, inventory will remain depressed further fueling shortages and pushing home prices higher.
Easier To Sell Your Existing Home
On the plus side, if you are looking to sell your existing home while purchasing a new home (which is common in real estate), there has never been a better time to sell.
Again, inventory is short meaning the houses that are available on the market are selling faster and at a premium (“sell high”). Sellers relying on net equity for their new purchase may even be able to put more down a new home or increase their purchasing power by putting less down on a home and increasing the overall amount financed.
For example, let’s say you sell your $200,000 home and are looking to use your net equity on the down payment for your next home purchase.
A 20% down payment on a $200,000 home will require about $40,000 out-of-pocket. Similarly, if you put 20% down on a $400,000 home would be $80,000.
At initial glance, the more expensive home seems less affordable, however if you receive more money from your sale, instead of putting it toward a comparable priced home you could put less down on a more expensive home.
Instead of putting 20% down, maybe only put 10% down. This makes the down payment requirement the same ($40,000) for both the $200,000 home and the $400,000 home, with the added benefit that you get more home for your money!
Near Record Low Mortgage Interest Rates
Speaking of purchasing power, let’s consider interest rate fluctuations using the purchase prices from the previous example.
If you are looking to buy and aren’t paying cash for a new house, you will most likely need a new mortgage to finance the transaction. It’s reasonable to want a desirable, low interest rate when financing your new home.
But consider the home with a purchase price of $200,000 with an average rate of 3.00% given the current trends.
A 30-year fixed rate mortgage loan in the amount of $160,000 at 3.00% would put your principal and interest payment at $674.57 a month.
If you waited to see if rates drop to near record lows again, the same mortgage with a rate of 2.500% would put your principal and interest payment at $632.19 per month.
Now granted that is a savings of around $42.38 per month, but does that really move the needle? Is losing out on your dream home really worth $508.56 a year you might save (no guarantees)?
If you wanted to keep your payment the same as the 30-year fixed mortgage at 3.00%, at the higher rate of 4.50% you would also only qualify for a loan amount of around $133,134, meaning you would lose between $25-30,000 in purchasing power.
The average annual interest rate for a 30-year fixed rate mortgage in 2020 thus far calculates to approximately 3.373%. Shortening your term to a 15-year or 20-year fixed rate mortgage could also earn you an even lower rate as they currently stand, saving you more each month.
Waiting and betting that rates will continue to decrease, when the trajectory for rates can really only increase, seems foolish.
Housing Market Holding Strong
The calendar year for 2020 is almost halfway over and the housing market has shown tremendous signs of a strength following the economic shutdown. As the housing market recovers, the Federal Reserve will ease back on relief measures and potentially allow for rate increases.
If rates increased to the annual average set in 2018 for a 30-year fixed mortgage, which was 4.54%, your estimated principal and interest payment would be around $814.50 per month (a $139.93 increase from the original scenario).
You don’t want to be on the side that doesn’t take advantage of rates while they are near an all-time record low.