Cost of Waiting
Cost of Waiting: Today’s 3.85% interest rate is a gift in historical context.
There have not been enough homes on the market for over five years now. This trend has been reinforced in 2017 with 7% fewer FOR SALE signs compared to last year. Buyers have been tripping over each other in search of their piece of the “American Dream.” The lower the price range, the harder it has been to secure a home.
It has been difficult and frustrating to be a buyer, and that has not changed in years; and, it is not going to change in 2018 either. It is easy to empathize with buyers, especially those with smaller down payments. Buyers cannot help but fall in love with a home, write an offer, and then find out that they are one of ten buyers bidding on the same home. They have a 10% chance of being the winning bidder. They are instructed not to fall in love with a home until they are the winning bid. That is easier said than done. Buyers are human beings. They write offers to purchase a home because it is a good fit for their family. They visualize how their furniture will be situated in their potential new home. They visualize where they will entertain the extended family on the 4th of July and Thanksgiving. They visualize life. How are they supposed to strip the process of finding a home from all of their emotions?
Most buyers have been busy writing offer after offer, falling in love with home after home. The process can be grueling and exhausting. It does not mean that it cannot be done; it is just not going to be easy by any stretch of the imagination. Tapping out is not the answer. As frustrating as the process has been, it is not going to improve anytime soon. Taking a short break is understandable, but buyers really need to talk themselves out of stating, “I’m going to wait to buy.”
What exactly are they waiting for? The inventory of homes is not forecasted to significantly rise for a very long time. Buyers will be facing limited choices for the long haul unless they are looking for homes in the luxury end. There are plenty of choices above $1.5 million, but that is simply not the typical buyer. The only reason there are more choices for luxury housing is because there are fewer buyers that can afford the high sticker prices. For the rest of the market, there are not enough options to purchase and demand is red hot.
So, what happens to buyers that do wait? The biggest risk is the eventual rise in interest rates. It seems that the experts and prognosticators have been calling for a rise in interest rates for a few years running; yet, the increases have yet to materialize. Everybody needs to understand that it took quite a bit of manipulation by central banks around the world to get rates down to these unbelievable levels. Rates will not drop further. Instead, as the central banks, starting with the U.S. Federal Reserve, reverse course on their monetary policies, rates will become more volatile and will begin to rise.
Will rates remain low for the coming year? It is quite likely; however, “don’t look a gift horse in the mouth.” This interest rate environment is a total gift from international central banks and our Federal Reserve. It will not be around forever. Down the road, many will look back at these interest rates and wish they had pulled the trigger and locked in for the long haul. When interest rates rise just 1% from where they are today, a $500,000 mortgage will cost an additional $297 per month, or $3,564 per year. For a $750,000 mortgage, a buyer is looking at paying an additional $445 per month or $5,340 per year. Over a five-year period the increase accumulates to $26,700; and, over the 30-year life of the loan, the homeowner will have paid an additional $160,020.