Why should we move up now?
Question of the week: Why should we move up now?
Answer: So you can have the home that you have wanted for the past several years.
Rob Chrisman, one of the, if not the, best commentators on the mortgage industry and markets geared to mortgage professionals, provides excellent information on a daily basis to thousands (tens of thousands) people in the industry every day. Rob has a great sense of humor as well and opened his daily commentary the other day with this:
Studies also show that there are three basic groups of people in the United States: homeowners with 3 percent mortgages who don’t want to move, wannabe homeowners who don’t want 8 percent mortgages, and renters who don’t care.
Over the past year or so I have written several times about what’s next for the housing market, and have had several conversations regarding “when to buy” with potential first-time buyers and move up buyers. The latter are the subject of our question of the week.
Last week the question was “when will rates come down?” It ties in nicely to this week’s question as in the commentary I said that rates will never get back to the Covid era rates just below or above 3%, so if you are waiting for that to happen to move, you will never move.
Back to Rob’s pithy comment, he is not wrong. Because of interest rates either preventing potential buyers from qualifying for the homes they want, or preventing potential buyers from moving up to their “dream” home, there is a significant amount of pent up demand—I’m not on a limb stating that there is a historic amount of pent up demand.
Consider those who were trying to buy a home during the pandemic, chasing homes as prices climbed and climbed and climbed. Losing out on their offers to others who bid well over asking price, and those, maybe the same competitors, offering all cash or significant down payments. For those looking to move up, they were hesitant, or stayed out of the market because they did not want to sell their homes and then not be able to buy a new one in the competitive market.
Exhausted from the market turning them down, many left the market to wait until it became “normal.”
Instead of moving from historically low rates and a rabid market for homebuyers, the market moved with no slow transition into a period of historic increasing of rates that did not result in a softening of prices in the housing markets, but due to lack of move-up buyers resulting in a market with lack of supply and stable to rising prices.
Result of all this, at least two years of pent-up demand from first-time buyers and move-up buyers who are waiting for “the” rate to move into the market. What happens when “the” rate is hit? Buyers flood the market; supply is not sufficient and prices remain stable or increase.
Why buy now? Get your bigger home, your next home, your “dream” home now and remove anxiety and stress in the future as the market gets more rabid with dropping rates.
Here is an example using a fairly generic couple that represents a significant portion of our client base.
Shaun and Alison purchased their home in Long Beach in July 2015 near the County’s median price, $475,000. They put 20% down using savings, part of Alison’s 401(k), and a gift. They obtained a $380,000 mortgage at 4% with a payment of $1815 per month. In July 2021 they refinance what was now a $335,500 mortgage for 2.625% and a payment of 1525 per month.
Since they moved into their three bedroom, two bath house with two small kids in 2015, they now have a third child and the small kids are bigger. They very much want a larger home.
Looking at the market, there are some homes that they feel would be very good for their family in the one-million-dollar range.
Their neighborhood continues to track the median price for LA County and they are able to sell their home for $850,000. Estimating about 7% for the costs of their sale, paying off the $319,000 left on their original mortgage, they will have net proceeds of about $470,000 from the sale of their home.
Because the have sold their home for less than $500,000 above their acquisition cost, they will not need to withhold any of the proceeds to pay capital gains tax on their sale (DISCLAIMER: I am not a CPA or tax professional, please contact one if you are selling your home with substantial increase in value since your purchase.)
Shaun and Alison have an offer accepted on a home that meets their wants and needs for one-million-dollars. Putting down the $470,000 they obtain a $530,000 mortgage with a 7% rate and a payment of $3525 per month.
Crystal ball…last week I postulated that I thought next year rates will drop down to near 6%, and in 2025 to near 5%.
Rates begin to drop and Shaun and Alison notice a few more homes for sale in their neighborhood, and to their delight see that prices are moving up due to higher demand.
Next September, Shaun and Alison refinance their mortgage, now with a $524,500 balance, at 6% and their payment drops to $3145 per month, saving almost $400 per month.
Rates continue to drop, home prices are steady with some slight growth, and in September 2025, Shaun and Alison are able to refinance their now $518,000 mortgage at 5% with a payment of $2780 per month, a savings of over $350 per month. Their appraisal for the refinance indicated a value of close to $1.1 million dollars.
One issue many potential move up buyers have today is similar to the issue they had during the pandemic, “what if we sell our home and there is nothing on the market we would like to buy?”
This is an issue in any market, and the biggest hurdle many move up buyers. There are a few solutions to this issue.
When negotiating with buyers ask that they will allow you to stay in your current home for 60-days after closing, paying the housing payment (mortgage, taxes, insurance, aka PITI) for the period you are still occupying the home. This should give you plenty of time to find and negotiate the purchase of your new home.
The other primary solution is a condition that you have ten, fifteen, so many days to enter a contract to purchase a new home, if you are unable to do so then the buyer can cancel the contract, or give you more time to find your home by extending the time frame.
Finally, you may need to move into temporary housing with your household items in storage—the least attractive option for every potential move up buyer.
If you are wanting to move up but are worried about a large increase in your housing payment, or not having a potential new home, schedule a time for us to talk about your numbers to see what your options are.
To schedule an initial meeting by phone or Zoom, click here for my calendar, please feel free to forward to a friend or family member!
Have a question? Ask me!
Data, data, data—it’s that time of the month when lots of economic date is released that can impact markets, and rates. The highlights this week:
- Relevant to commentary above, pending home sales up in August from July, the 2nd monthly increase in a row.
- GDP for the 2nd quarter was revised down from the initial estimate of 2.4% growth to 2.1% growth.
- Consumer spending jumped 0.8% in July, highest increase in six months, listed causes for the increase are Amazon Prime Day (it’s biggest ever), “Barbenheimer” and the phenomenon of the summer—Swifties spending lots of money on tickets, merchandise, hotels, etc to see Taylor’s record breaking concert tour.
- Overall spending up 1.7% in the second quarter after inflation
- Personal Consumption Index (PCE), the inflation gauge used by the Fed when deciding what to do with its benchmark interest rate, was up 3.3% for the 12-month period from July 2022 to 2023, much higher than 3% year over year increase in June.
- 187,000 jobs were added to the economy in August, the 3rd month in a row with an increase, more people are looking and not finding work however, as shown by the increase in the unemployment rate from 3.5% in July to 3.8% in August—the higher rates in the past year and a half.
What’s it mean? The data was a mixed bag. On the one hand the increase in PCE supports the Fed increase rates, on the other the higher unemployment rate supports a pause. On the one hand the revised GDP data showing slower gross is positive for no rate increases, on the other the increase in personal spending puts pressure on higher rates. Overall the news this week fairly good for rates as the data’s mixed bag of positive-negative shows an economy in flux trending to slowing, which is good for lower inflation and eventually rates.
Rates for Friday September 1st, 2023 Conforming rates have their biggest weekly drop since mid-July as investors react to the economic data and potential for lower rates continuing.
FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS FOR PURCHASE TRANSACTIONS:
30-year conforming 7.00% Down 0.25%
30-year high-balance conforming 7.50% Down 0.125%
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 years continue to pass, letting us acknowledge and celebrate the big changes in our life. Last week marked the twenty-fifth anniversary for us in our current home, having moved in at the end of August 1998 in the middle of a heat wave. Our biggest concern was not what went where, but our dog Cooper in the heat in a new home with no shade outside. Our first projects were to tear out a brick patio area and replace it with grass, and put a roof over the patio by the house for a sitting area.
A bigger life event anniversary occurs on Monday when Leslie and I celebrate our 29th wedding anniversary. Two kids, two houses, three dogs, and many, many, wonderful adventures have shaped our lives together—some men may be as fortunate to have a wonderful wife and life partner, but none more so than me.
Have a great week,
Dennis
Past Weekly Rate & Market Updates can be found on my blog page at my website www.DennisCSmith.com/my-blog
