A home your clients like/love and can afford now may become unaffordable later.
There Are Costs Associated with Waiting to Buy
You as an agent/broker have mountains of information and expertise to share and clearly communicate with your clients. One slice of this “mountain” that clients must recognize/understand is how “waiting to buy or sell” affects the impact of rising housing costs…and it’s up to you as your clients’ agent/broker to expertly and clearly communicate this “impact.”
Housing prices continue skyrocketing; inflation is rising faster than industry expectations (and wages) and mortgage interest rates have begun and will continue rising. These three things translate into higher housing costs.
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Skyrocketing Housing Prices
The National Association of REALTORS® (NAR) indicated that the median existing home price for ALL housing types in August jumped to $356,700, an increase of +14.9% y/y from $310,400 in August 2020.
Zillow has since forecast a +11.7% jump in home values for 2022. This +11.7% increase in home values is on top of the +17.7% increase in home prices over the last 12 months, according to Zillow.
So…a home that cost $300,000 in January 2021 now costs $353,100. At the end of 2022, Zillow predicts that this same house will cost $394,413, or +11.7% more than the house costs now.
If Zillow’s forecast is correct, the cost of waiting to buy this house until the end of 2022 amounts to an additional $3,478/month.
Increasing Interest Rates
Many agents/brokers haven’t discussed the impact of increasing interest rates with their clients. Why not? Interest rates have been trending down since 2000 before hitting an all-time low of 2.67% in December 2020.
This “trending down” is going to end by the end of this year as the Federal Reserve gradually begins tapering its COVID relief strategy. Freddie Mac believes that 30-year fixed-rate loans will rise to an average of 3.7% by the end of 2022. Other experts predict that interest rates will rise to 4.0% by the end of 2022.
Let’s assume that interest rates rise from 2.7% to 3.7% by the end of 2022. Such an interest rate rise would translate into borrowers paying additional interest payments from $26,986 to $31,475 during the first 10 years of owning the house. If the owner/borrower remained in the property for 30 years, interest payments would increase from $55,595 (if they bought the house now) to $66,019 if they bought the house at the end of 2022.
One more thing for clients to know and consider…according to the US Department of Housing and Urban Development (HUD), the national median income for 2021 stands at $79,900. Unless a home loan borrower puts down 20% even at an interest rate of 2.7%, over half of the home borrowers would NOT be able to quality for a mortgage for a median-priced home in this market.
Qualifying for a 3.7% home loan in 2022 would translate into the home loan borrower having to earn and verify an additional $7,525 in income.
Right now, today, inflation is running at 5.3%. Let’s assume that your clients can afford a median home price of $356,700. Based on the current 5.3% inflation rate, in October 2022, your same clients would only be able to afford a house that cost $337,795.
In other words, a 5.3% inflation rate shrinks your clients’ purchasing power by $1,545.83/month.
For buyers, the total cost of waiting to buy is $90,638 if you add up predicted housing cost increases ($41,373), predicted interest rate increases ($30,360) and current increased inflation (18,905).
For sellers, there will be fewer qualified buyers in 2022 than there are now. Fewer qualified buyers mean less demand. Less demand means lower home valuations.
Thanks to Zillow, Freddie Mae, Department of Housing and Urban Development, Bernice Ross and Inman.