We’re already into 2018 and it looks like we’re in store for a rather healthy housing market to start the year and most economists think the economy will continue to improve well into 2019. And that’s all a very good thing, especially looking back where we were say 10 years ago. The economy is back on track, housing is getting a boost and jobs numbers are still impressing forecasters. But as the economy continues to improve, there are some drawbacks, especially as it relates to first time buyers or those who are sitting on the sidelines, putting extra money back each month to be used as a larger down payment to buy the house they really want. While saving is certainly a good thing, waiting too long to buy may not.
When home buyers first get prequalified, they’re actually getting prequalified for a specific loan amount and not for the actual price of the home. That might go without saying in most circles but it does bring up a good point for those new to home buying. When you first start looking at homes for sale online or with your real estate agent you’ll see the list price of the home. Buyers are prequalified for a certain amount using current interest rates and terms. If they’re qualified for say $250,000 and they want to buy a $500,000 home they certainly can do so if they come up with another $250,000 for a down payment. But the qualifying loan amount will do nothing but drop over the next several months and into the next year. Why? Because we expect two and maybe three interest rate increases over the next year. Four increases if the economy gets too hot.
As interest rates move up affordability goes down. One year and three rate increases ago, home affordability was at its best levels in years as home values slowly began to recover while interest rates remained low. Yet Fed rate increases in 2017 directly affected the cost of funds and could very well do the same in 2018. Saving up for a larger down payment can also mean someone is treading financial water. As rates move up buyers will have to put more money down just to keep up with rate changes. At some point, it can mean the buyers have to put down more than they intended or have access to which in turn means they’re forced to buy a less expensive home. Interest rates won’t be moving down any time soon, either. The only two directions for rates to go is sideways and up.
Let’s do a little more math to see how waiting to buy impacts affordability. Let’s say that interest rates move up by 1.0%, which they have over the past year. This means your qualifying mortgage payment, which stays the same unless you get a raise or otherwise add more regular income, stays the same. But with higher rates, you’ll need to scale back your sales price by about 10%. That’s just how the math works.
To add to this calculation, let’s say home prices where you want to buy begin to rise and rise rather quickly as the market continues to improve and buyers want to leverage as much as they can and rush to buy sooner rather than later. What if home values increase by 10% when you’re ready to buy? That means you’ll need to come in with more down payment to buy the very same house. Now, couple the 10% increase in sales price along with a reduction in buying power by another 10% and you can immediately see the impact. 10% higher and 10% lower equals a 20% change in buying power. Acting now avoids that 20% change and in a healthy housing market that property appreciation belongs to you.