The sky isn’t falling, but with the price of housing continuing to rise, it’s possible they’ll break through a ceiling and cause debris to come cascading down. Sorry – that sounded far more melodramatic than I had intended.
One of my clients sent me a text asking for numbers on a payment. Before I could respond, she sent me a second text wondering if purchasing right now was the best thing to do or if she should rent for two more years until other matters in her life calmed down.
Her musings about whether it was smarter to purchase, or rent is the reason for this article. I feel it is wise to inform you of some numbers so you can gain your own perspective on the real estate market.
Assuming a $450K purchase for a first-time homebuyer right now, and you qualify for a rate of 4.5% on a 30-year fixed mortgage with a 5% down payment. The loan size will be $427,500. The payment (principal & interest) on this would be $2166.08. This does not include property taxes, homeowner’s insurance, or private mortgage insurance (PMI).
Hypothetically speaking, let’s assume you wait another year to purchase. While I do not have a crystal ball, pros and pundits have predicted that home prices will rise between 10%-18% over the next 12 months.
If it’s 10%, that home is now going sell for $495K. With a 5% down payment, that will be a loan of $470,250, and at a 4.5% interest rate (assuming the rates magically stayed the same) on a 30-year fixed mortgage, you’ll be looking at a P&I payment of $2382.69. If the interest rate on your mortgage rises to 5%, your payment would be $2524.40.
If prices increase by 18% in 12 months, you’re looking at a price of $531K. After a 5% down payment, you’ll have a loan of $504,450. The P&I payment at 4.5% would be $2555.97; at 5%, it would be $2708.00.
Summary:
Buying now, your monthly payment is $2166.08, and your down payment would be $22,500.
Wait a year with 10% increase in prices, your monthly payment is $2382.69 at 4.5% and $2524.40 at 5%, and your down payment would be $24,750.
Wait a Year with 18% increase in prices, your monthly payment is $2555.97 at 4.5% and $2708.00 at 5%, and your down payment would be $26,550.
This means that if you waited and had just a 10% increase, you’re going to pay $216.61 more per month at 4.5% and $358.32 more per month at 5%. Annually, that means you’ll be paying $2,599.32 more at 4.5% and $4299.84 more at 5%.
Further, this means that if you waited and had an 18% increase, you’re going to pay $389.89 more per month at 4.5% and $541.92 more per month at 5%. Annually, that means you’ll be paying $4768.68 more at 4.5% and $6503.04 more at 5%.
Here’s where it gets interesting!
Let’s assume the person who qualifies for a $450K purchase with 5% down has a couple of items of debt: a car loan, a student loan, two credit cards – normal debts. This person would need to earn just over $80k per year to qualify for this mortgage.
In order for that same person to qualify for the $495K purchase (10% increase), they would need a 3.2% raise if the rate stayed at 4.5%; they would need a 5.3% raise if the rate were to go up to 5%.
For the $531K purchase (18% increase), they would need a 5.9% raise if the rate stayed at 4.5%; they would need an 8.1% raise if the rate were to go up to 5%.
When you started reading this, most of you were probably thinking I was going to try and make a case for how vitally important it was to purchase NOW or else you might get priced out of the market – the shock and awe tactic to get people to act now. This is not true. However, as you read the analysis of the amount of a raise a person would need to meet these new changes in price and rate, many of you might be thinking I’m trying to encourage people to wait. Not that either.
I simply wanted to bring a little reality into the discussion when we’re talking about price increases and rates on the rise. You can clearly see that just because the price of a home increases by 18%, a buyer doesn’t need to see an 18% increase in their earnings to meet the requirements of that new mortgage payment.
As you’ve already read, a 10% increase in price may only require a 3.2%-5.3% increase in earnings; an 18% increase in price may only require a 5.9-8.1% increase in earnings.
That said (and this is where I’ll put in the shameless plug for buying now versus waiting a year), whatever your annual raise may be next year over this year, wouldn’t you rather buy now and lock in your monthly payment so that you can spend ALL of your raise on something YOU choose? As always, if you have any real estate questions or are looking to buy or sell your home in Heber City, Midway, Utah or Salt Lake Counties, please reach out to me with any questions. Please reach out to me at (801) 885-2558 or by email at brandonrwood19@gmail.com.