Are you trying to time the Real Estate Market?
Are you waiting for that perfect market to buy your next home? Hi, my name is Kevin Yoder with Yoder Real Estate. I’m a 20-year industry veteran in the real estate industry, and we’ve seen it all. We’ve seen the highs. We’ve seen the lows. We’ve seen high interest rates, and low interest rates, high property values, and extremely low property values. And so, today I want to address the one thing that’s at the forefront of most home buyers’ minds, which is the current interest rates. And so, this is leading a lot of buyers to thinking about possibly waiting. In fact, not just thinking about it, actually waiting.
I want to share something with you that I really hope is going to be helpful so that you can put all the facts on the table and then you can make an educated decision on when the right time to buy is for you, but based on real facts, real numbers, and real statistics so then you can really decide, is this the best time for me? And then move forward accordingly. So let’s talk about that.
For the last two years, the real estate market has been really noteworthy. What made it noteworthy is the high prices of properties. So you want to go out and buy a home. It’s 2021. We’re rolling this thing back a year ago. And the biggest challenge that home buyers had was multiple offers. And any given day, and anywhere USA, if a buyer went to put an offer on a home, we all know the story, 10, 20, 30, sometimes over 50 offers on that property. And a house that was listed for 300 might sell for 350, or 380, or even over 400,000, for example. And those numbers vary all over the country. I was giving you some West Michigan numbers there. And the biggest challenge was that, is that the prices were just getting elevated so much.
Where were interest rates then? We know the answer. Interest rates were around 3%. Super, super low interest rates. High prices, low interest rates. And buyers would say, “If I could just get into a home, I would be happy. If it wasn’t for all these multiple offers, wouldn’t that be great? Gosh darn it, I’m so frustrated.” Guess what? Here we are in a silver platter, there’s not as many multiple offers. In fact, in some price ranges, they’re nonexistent. But guess what? The interest rates are now higher.
So this is the fallacy that there’s somehow some perfect nirvana of 3% interest rates and super low prices. Friends, it’s time to start realizing that when one of these starts to go up, the other typically is offsetting that. So the truth of the matter is, there isn’t really a perfect place where interest rates are low and prices are low. When those prices start to come down, guess what happens to interest rates? They go up and vice versa.
And so, I think it’s important to line these things up side by side. The example is this. Let’s just say it’s last year, 2021, interest rates were 3% in October, a year ago today. The home that you wanted to buy would cost you $400,000. Okay? Let’s say it was listed for 350, you’d probably pay 400 for it. So, in that scenario, your down payment would be 5%. You would then have a loan of 380,000, and your payment would be $2,010.
- Interest rate: 3%
- Purchase price: $400,000
- Down payment: 5%
- Loan amount: $380,000
- Loan to value: 95%
- Monthly payment (Principal, interest, taxes, PMI): $2010
- Interest rate: 7%
- Purchase price: $340,000
- Down payment: 10%
- Loan amount: $306,000
- Loan to value: 90%
- Monthly payment (Principal, interest, taxes, PMI): $2413
Now, bring that forward to today is you would pay $340,000 for the $350,000 home. Your down payment would be 10% instead of only 5%, because typically, last year, buyers were having to put that down payment money towards what’s called appraisal gap coverage to show up the difference and escalation clauses, and, and, and. So higher down payments now, so a better position in the property. And then secondly, a better equity position right out of the chute. And then the loan now would be at 306,000 instead of 380. Now, what does that monthly payment look like? Instead of $2,010, it’s about 2,413. So there’s about a $400 difference.
But let me make something extremely clear here, because if you’re thinking, “Well, I’m paying $400 more per month,” remember something really important is that, if this was last year, you’ve purchased a home and you have a loan of 380,000 and the home value is lower than that right now. So that’s called a negative equity position that we don’t ever want to be in. The benefit of buying a home with a high interest rate environment and lower prices is that you can actually refinance out of your current interest rate when interest rates finally drop. But guess what you can’t refinance out of? You can’t refinance out of a higher price home. And so, if you were to lay these things on the table, realizing that the payment is about $400 more now, but guess what you have if you were to take advantage of home ownership today? If you’re going to wait a year hoping that interest rates fall, and they could, and they likely will at some point because seven is higher than what we thought they’d go to, and all the signs are pointing that direction, but let’s just say it’s a year, you would have one year of mortgage payments paying down the mortgage and that much more equity in your property.
When you line that up, this $400 is a non-issue. And so, you’ve had an equity gain of an entire 12 month period and you’re able to refinance out of your home. So you have less of a loan, you’re going to have eventually a lower interest payment, and one year of equity gain. So, ultimately, it’s just that important. It’s that important for you to have all the information in front of you. Don’t get sucked into the high interest rates trap. I put those scenarios for you below so you can look at those side by side so you can see it with your own eyes.
And then the last thing to realize too about the interest rates, if you were to go and just Google mortgage interest rates 30 year history, and it shows you a timeline, you’ll notice that 7%, even though it’s higher than it has been, is still lower than the median for 30 years. Everything’s relative. Everything’s relative to the highs and the lows. So realizing that we’re still even at 7% lower than what the median would be for a 30-year period. So it really comes down to this, when one asks the question, “Do I want to buy a home?” don’t get stuck in just looking at the interest rate only, look at all factors. And then realize that, when the prices eventually do come down, the interest rates.. I’m sorry. When the prices start to go up, that means the interest rates going to drop and vice versa. It’s going to look like this.
So it really comes down to, is it the right time for you? Do you have adequate savings in your bank account so that you can weather the storm in case of furnace or water here goes out? Are you tired of renting? Have you balanced the benefits of home ownership against the downside of renting, paying someone else’s mortgage? And so on? So there’s no sweet spot. It’s just a sweet spot for you.
Hopefully, this is helpful for you. If you want to know more how to navigate and win in any market, specifically in this new market, this shifting market, we have strategies at place at Yoder Real Estate that we’re helping our buyers win with each and every day, unique, different things that are out-of-the-box, and I would say, in some ways, cutting edge. If you’d like to know more about that, how you can actually become a homeowner with these strategies, give us a call. And we’re also here to answer any questions that you may have. You can find us online at yoderrealestate.com. And we look forward to connecting with you soon.
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