Concerning housing trends have emerged in recent market data. Home price gains slowing, inventories in key markets increasing for the first time in 3 years, and rising interest rates all suggest home prices may be soon stalling.
For most of 2018 both home prices and interest rates have marched upward, defying conventional logic. Unless individual wages dramatically increase, either rates or prices will have to retreat. Given wages continue to see only modest gains, and interest rates are trending upward, home prices look to be the more vulnerable.
Thus there is valid reason to believe the peak for housing prices is very near, if not already here.
So if prices are vulnerable to falling, why is now a good time to buy?
The most common hesitation amongst fence-sitting buyers is “prices are going to fall.” That may very well be true, but it ignores a key variable: interest rates.
Home prices and interest rates are somewhat in equilibrium now, but further rate increases will almost certainly lead to price declines. Let’s look at an example where rate increases yield a 10% drop in prices:
$500,000 purchase price, 50k down, 4.875% interest rate = $407,315 in total interest
$450,000 purchase price, 50k down, 6% interest rate = $463,354 in total interest
In this example the buyer’s patience was rewarded with a $50,000 price savings. However, they will now pay over $56,000 in interest during their 30yr loan term…a net loss of over $6,000. Moreover, in 30 years the home will likely be worth the same whether the buyer paid 450k or 500k initially.
Does waiting guarantee more in interest paid than price savings received? Of course not. But there’s no guarantee waiting will yield any price savings either!
There’s nothing more human, nor more infallible, than trying to time markets. From the first time home buyer to the seasoned stock trader, we are all guilty.
Time and again, “buy and hold” has proven to be the most effective investment strategy. From stock investor extraordinaire Warren Buffet to the average homeowner, the key to growing wealth is “time.” Not “timing.”
Or as the Chinese proverb says: “The best time to plant a tree was 20 years ago. The second best time is now.”
Are you contemplating a home purchase?