I am
convinced that 2013 will go down on record as the best year in our lifetime to
buy a new home. It’s pretty simple –
prices were near the bottom and interest rates were ridiculously and
artificially lower than at any time in history, thanks to the Federal Reserve’s
efforts to jack up the economy with “free” money (okay, nearly free).
Last
February, I had one client close on a 30 year loan with a rate of 2.875%. That is a fixed rate. Yes, it really happened.
Many others
closed at 3.25%, 3.50% or 3.75%. Again,
all utterly ridiculous in the context of historical norms (see chart to right).
The fact is,
that with just over 10% appreciation (last year’s average in Denver) and a 1% increase in
rates (which happened over the course of the year), the monthly payment on a new
purchase December 31 was 26% higher than it was on January 1.
That’s why
last year was the best time ever to purchase a home.
So what does
that mean today? Have you missed the
market?
Of course,
everyone must make their own decisions, but for reasons I have outlined
extensively on this blog, I think there’s plenty of gas left in the tank – but with
a strong bias toward better performance at the lower price points.
As I
discussed in my 2014 Client Letter, the Federal Reserve has announced it will
discontinue its policy of “Quantitative Easing” (printing money for banks to
use on mortgage loans, then buying back the notes at below market rates) by the
end of this year.
That’s $1
trillion in mortgage capital annually that the Fed has said will go away.
Does that
mean higher rates? Assuming the economy
continues to make strides and there are no unforeseen global disruptions
(terrorism, war, chemical attacks on US soil, etc), I would place the odds of
higher rates by year end in the 90th percentile.
So have you missed
the market if you didn’t buy last year?
Well, let’s consider
a couple of scenarios.
Let’s say
real estate matches its performance of 2013 (optimistic, but possible). If values go up 10% and rates go up 1%, your
payment one year from today will be 24% higher than it is today.
A $250,000
purchase with a 10% down payment would have a $225,000 loan. At 4.5% over 30 years, your monthly principal
and interest payment is $1,010.
A $275,000
purchase with a 10% down payment would have a $247,500 loan. At 5.5% over 30 years, your monthly principal and interest payment is $1,254.
That’s a 24%
increase.
You can
easily run scenarios on other projections as well.
A one
percent increase in rates coupled with 5% appreciation leads at an 18% increase
in payment.
And for the
naysayers… let’s say housing is flat in 2014, with no appreciation at all. A one percent increase in rates will drive
your payment 12% higher.
That means
the likelihood of higher payments at year end is a virtual certainty. That means your dollar goes further now.
And remember
that mortgage payments, unlike rent, do not adjust for inflation or future
market conditions. A $1,200 P&I
payment today will be the same payment in 2019, 2024, 2029 or however far out
you wish to project.
It’s
mid-January and the market is already teeming with buyers. Inventory remains near all-time lows. Distressed sales are history.
With each
passing day, housing will become more expensive, meaning that when it comes to
making a move, sooner truly is much better than later.
