3-2-18: What is the cost of waiting?
Question of the week: What is the cost of waiting?
Answer: Last week we discussed if we are in a housing bubble and if I thought it could pop and send real estate prices, at least in Southern California, tumbling again. The follow up to that question is, what is the cost of waiting if you feel the market will decline in the future and are waiting “buy the dip” when you feel that occurs.
This is something I analyze about once a year and it is time to revisit the topic. Past performance is no indication of future performance, but can give us a look at the costs associated with waiting to purchase should prices and/or rates continue to go up.
In January 2017, the median price of a home in Los Angeles County was $509,130; in January 2018 the median price was $564,100. The 30-year fixed rate I quote every Friday was the same on the last Friday of January 2017 as it was on the last Friday of January 2018 at 4% (after dipping as low as 3.625% in late summer early fall) to the cost of money was constant.
Assuming 20% down what was the cost to those who waited to purchase in January 2018 instead of purchasing the year before? Here we see the difference in down payment and monthly mortgage payment between purchasing the median home in January 2017 verus January 2018:
| PRICE | LOAN AMOUNT | RATE | PAYMENT MONTHLY | DOWN PAYMENT |
| $ 509,130 | $ 407,304 | 4.000% | $ 1,945 | $ 101,826 |
| $ 564,100 | $ 451,280 | 4.000% | $ 2,154 | $ 112,820 |
| DIFFERENCE | $ 209 | $ 10,994 |
As you can see, waiting one year—even with no change in rates, increased your down payment by 10% and your monthly payment by 10%. In the first year of home ownership the cost of waiting from 2017 to 2018 cost about $13,500—and the cost will increase about $2500 per year. (Note the actual cost is higher since you will have higher property taxes with the higher purchase price.)
From a qualifying standpoint, if your monthly payment for the mortgage (not including taxes, insurance, homeowners association if applicable) cannot exceed 30% of your monthly income then from January 2017 to 2018 you would need to make about $8400 more per month to qualify.
To recap, by waiting from last year to this a home buyer in Los Angeles County needed to earn over $8400 to qualify for the loan, spend almost $11,000 more in down payment and have mortgage payment that is $2500 more per year.
Let’s play what if….What if you are ready to buy today but decide to wait for prices and/or rates to dip back down? And what if during this waiting period prices and/or rates go up? Here is a chart showing price increases of about 5% from today’s median price and rates going up to where I, and others, think we may be by the end of 2018:
| PRICE | DOWN PAYMENT | LOAN AMOUNT** | PAYMENT 4.375% | PAYMENT 4.50% | PAYMENT 4.625% | PAYMENT 4.75% |
| $ 560,000 | $ 112,000 | $ 448,000 | $ 2,237 | $ 2,270 | $ 2,303 | $ 2,337 |
| $ 585,000 | $ 117,000 | $ 468,000 | $ 2,337 | $ 2,371 | $ 2,406 | $ 2,441 |
| $ 615,000 | $ 123,000 | $ 492,000 | $ 2,456 | $ 2,493 | $ 2,530 | $ 2,567 |
| $ 645,000 | $ 129,000 | $ 516,000 | $ 2,576 | $ 2,615 | $ 2,653 | $ 2,692 |
Digging into this a little bit, if prices do not go down but rates do you can payment increases of about $33 per month. If the rate stays the same but the prices increase you can see payments go up over $100 per month for every 5% increase in price, and the amount of money needed for down payment will increase as well. Should rates and prices continue to climb the amount of money needed to for down payment and monthly payment increase exponentially.
I have ** Loan Amount because as the loan amount increases there is a very good chance that you could move from the conforming rate to the high-balance rate—further exacerbating the monthly cost for the mortgage.
There are always a lot of what-ifs when we consider the future and try to predict anything, especially markets. However, there are a lot of factors that would support the chart immediately above, from economic growth to homeowners not selling as frequently as they have in past markets which leads to inventory scarcity. All the data I see supports that if you are ready to purchase a new home now you should not wait as the downside of higher costs and payments is more likely, in my opinion, than any potential upside to lower costs and payments dependent on prices and/or rates receding enough to make the wait worthwhile.
Using those who waited through 2017 as an example, those who were ready in January 2017 that are still waiting have seen not only prices but also rates increase through February, making that wait even more costly.
Are you ready to buy? Call me to discuss your options and abilities in today’s market, or find out what needs to be done so you are ready to buy sooner rather than later.
Have a question? Ask me!
We have a new Fed head, Jerome Powell steps into the chair, previously occupied for the past four years by Janet Yellen. On Tuesday Powell had his first public testimony and told Congress he sees a strengthening economy but did not go so far as to answer directly questions from members of Congress if this means he sees four rate hikes this year instead of the previously assumed three rate hikes. Naturally his not saying, “there will not be four hikes” caused investors to sell on bonds and mortgages pushing rates up.
The second adjustment to Gross Domestic Product for the last quarter of 2017 was released and saw a slight revision downward, from 2.6% growth to 2.5%. This had minimal impact on rates. There was no impact on rates with this data.
There was some positive economic news this week for workers. In February, personal income rose a very strong 0.4%, the second such monthly increase in a row. Higher wages are great, but what was really strong was the 0.9% increase in disposable income due to the tax cuts hitting paychecks with the reduction in automatic withholdings. With prices up only 1.7% for the year workers are seeing their dollars stretch a bit further.
Rates for Friday March 2, 2018: Markets continue to be fairly volatile inter- and intraday depending on the news—either economic or political. When there is this type of volatility it usually suggests there is a breakout, either up or down, approaching. We have a rarity with mortgage rates for 2018 as the conforming rate has remained unchanged for three Fridays in a row, the last time that happened was in mid-December to early January (when we went eleven weeks in a row with no week-to-week change). We always like stability—however I am cautious as to how long we will enjoy it. Lock your rate when you can.
FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS:
30 year conforming 4.25% Flat
30 year high-balance conforming 4.50% Flat
Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down with 740 FICO score for purchase mortgages.
The Academy Awards are this weekend and I cannot recall the last time I saw so few of the Best Picture nominees—many are on our list to see but we have not had the opportunity to see them. Leslie and our youngest daughter are big fans of the award show, I am not so excited so will no doubt be watching something on Netflix while they are cheering or jeering through the show.
Nice to have some rain today, stay safe on the roads!
Have a great week,
Dennis
