The Cost of Waiting for Prices to Fall

by The KCM Crew on February 11, 2011 · 92 comments

Many purchasers have been sitting on the sidelines waiting for home prices to hit bottom. They want to guarantee that they are purchasing at the best possible price. Like them, we also believe that prices still have some room to fall in most markets. However, we disagree that waiting is a good financial decision. The buyer should not be concerned about housing prices. They should be concerned about cost.

The cost of a house is made up of the price AND THE INTEREST RATE they will be paying. Two different pieces of news released yesterday highlight this point.

PRICES

The National Association of Realtors (NAR) released their 4^th quarter housing research report. In the release, they reported that home sales rose 15.4% in the 4th quarter over the 3rd quarter. They also showed that prices remained stable during the year:

The national median existing single-family price was $170,600 in the fourth quarter, up 0.2 percent from $170,300 in the fourth quarter of 2009.

A buyer who delayed a purchase might find solace in the fact that prices have not increased. However, the other news released yesterday paints a different picture.

INTEREST RATES

The Primary Mortgage Market Survey was released by Freddie Mac which showed that the 30 year fixed rate mortgage was at 5.05%. Frank Nothaft, vice president and chief economist of Freddie Mac said:

“Long-term bond yields jumped on positive economic data reports, which placed upward pressure on mortgage rates this week…As a result, interest rates on a 30-year fixed-rate mortgage rose to the highest level since the last week in April 2010.”

So prices have remained stable but interest rates have risen dramatically in the last 90 days. What does that mean to a buyer looking to purchase a home this year?

The price is the same. It just costs more.

Let’s show you what the news means:

By sitting on the sidelines for the last 90 days a purchaser lost:

$89.44 a month
$1,073.28 a year
$32,198.40 over the thirty year life of the mortgage

If you buy a $340,000 home, double all these numbers.

Bottom Line

Even if prices fall another 10% this year, the cost of a home will increase if interest rates go up more than 1%. Buyers should not worry where prices are going. They should be concerned where costs will be later in the year.

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About The Author

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TR

AHH !

Very nicely done. But what do we do w/ the strong cash (or mostly cash) buyer(s), who all markets have. At some point the values must stop falling, but I see this group as less affected by rate, and more by price.

Thoughts ?

Enjoy your topics

TR
http://thewestchesterview.com Ruthmarie Hicks

The caveat I would add is to do your homework. If you plan to be in a home 10 years – calculate the cost. If you plan to be there under five years or you are paying cash – calculate accordingly. Though in general – I think that people should rent if their timeline is under five years.
http://hometoindy.com Paula Henry

I am seeing this happen in many areas where I live. Buyers who have not acted on a home at an interest rate of 4.25% are now wishing they did.
As far as cash buyers, they seem to think they can always come in much lower, but those homes are getting multiple offers and too low will lose the deal.
http://thewestchesterview.com Ruthmarie Hicks

Sorry – I hit the submit by accident! Just wanted to add that this was very well done. I did something like it on my own blog in October. The buyers didn’t listen and now I have a couple of them who have lost enough buying power so they are out of the market.
http://www.angelabatchelor.com Angela Batchelor

I did a TV segment on this exact same topic this morning! What a great way to illustrate this for buyers!
http://bethesdabuzz.com Josette Skilling

My own son and his wife experienced this firsthand. At 4.25% they had purchasing power up to $510K but once the rate crept up to 4.75% they lost $15k in purchasing power to get to the same payment. The really hard part of this story was trying to get a seller and seller’s agent to understand that their listing was overpriced and that the offer in hand was not “grossly under” but right on the market. With a rate lock ticking away there was not enough time left to try and work it out with that seller, who ended up withdrawing their home.

So it’s not just buyers but sellers as well who need to understand how important it is when those rates rise. Price ultimately can’t stay the same if those rates stay higher because the buyers won’t qualify anymore.

Keep up the great work! More folks need to understand how vital financing is to the whole picture…
http://www.HomeCenterSothebysRealty.com Gail Yuhas Cove

The rise in mortgage interest rates is convincing impetus for the cautious, deliberating buyer to take action now and through this spring. Those trend-watching, market-knowledgeable, patient consumers will take advantage of the yet low but climbing rates. Possibly choosing to purchase a tad bit less of a property than originally planned.
The juxtaposition of increasing rates and the resultant effect upon financing affordability will push sale prices of entry-level homes somewhat lower – in order to make up for the “affordability differential” for entry-level and retirement-home buyers. As 2011 progresses, the “affordability differential” will likely encroach upon the sale prices of mid-range and upper-range homes reflecting the consumer shift from one home value range to the next greater.
We have seen (what I term) the “affordability differential” before. You have described it perfectly in your article.
http://www.mauirealestate.com Billy Jalbert

@TR – I always ask the buyers if they are cash or a loan and reference what I consider to be two different windows of opportunity. IMO The folks with cash have more time and negotiating power. @ The KCM Crew – love the tips and insights into better, more professional salesmanship that you provide.
http://www.lonnimcdonough.com Lonni McDonough

Rising rates have also put 2 of my buyers at risk of losing deals. Rate locks expiring and putting buyers above budget or throwing off financing ratios is real and we need to educate consumers. Thanks KCM Crew for all you do to provide us and the public with timely Real Estate information!
http://www.charlottesvillerealestatesolutions.com/charlottesville_real_estate/properties/homethumbs/officeid:K1247 Charles McDonald

Excellent post.
The cost of a home not always just the price.
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http://www.dimatteogroup.com Daniel Di Matteo

I’ve been sharing this kind of information for a year but many people are still so fearful or set in their own ways which leads them to make bad financial decissions.
Frederick Ritscher

Understand what is being said, but, anyone who is so leveraged that a 1% rise in the interest rate “puts them out of the market” should perhaps check again on just what sort of domicile they think they require, and what it should cost. The present state of the market, and cheap money has led a considerable number of would be home owners down the primrose path to foreclosure and bankruptcy, and they did not get there without help from the very forces that are whooping up “buy now before you lose again nonsense.”

http://www.steveharney.com Steve Harney

Hi Frederick,
I’m confused by your last comment. Are you suggesting that, if someone is going to purchase,they should wait? If so, on what are you basing that strategy?

http://www.salesbyjane.com Jane Myrenget

This is valuable information for buyers and sellers. I have too many clients “waiting for the bottom” to happen. Great info to pass on.
Christian Durland

Steve….I actually interpert Frederick’s comments to mean that all of us in the Real Estate and/or Mortgage Industries are to blame for “mortgage meltdown” due to his obvious belief that we have nothing better to do than to constantly tell people they should real estate in any market.

However, what Frederick is missing is that from circa 2001 – 2007, it wasn’t us in the industry that were the first ones telling potential home-buyer’s they should buy, it was the potential home-buyer’s friends, family, co-workers, and neighboors telling them they should buy, because they had just bought, and subsequently those potential home-buyer’s were knocking on our doors asking for loans and real estate services. It was the media blasting on a regular basis about how “hot” the real estate markets were, and that you needed to get in now. It was the reality t.v. shows profiling real estate investors flipping properties for big money, etc. Furthermore, it was consumers feeling confident about thier jobs and life in general, and the booming credit economy that was proping it all up. We as Realtors and Mortgage Originators were merely facilitators of demand…..I didn’t have to even run numbers, present math, explain Cost vs. Price, or barely prospect for potential home-buyer’s….they were abundent, ready and willing.

The affordability index is at an all-time high, so it is a fact that the current time presents one of the best times to purchase real estate in all of our country’s history…period….regardless of weather or not consumers believe what we say as industry professionals, the numbers can’t and don’t lie.

Rates will go up at some point, and along with it home-prices and other goods and services due to economic growth….weather that happens in 5 months or 5 years, it will happen….all I know is that we are well, well, well off the top, and I agree, and I am telling my clients with conviction, while all the other aforementioned friends, family members, neighboors, etc. are not, that if you have the ABILITY, that now is the best time to buy not only real estate, but as much of anything else you can too!

Remember….Warren Buffet is famous for saying: “Be fearful when others are greedy and greedy when others are fearful.”
jill

Come on Christian, the I may have been wrong, but so was everyone else” routine is crazy. Leading up to the crash and well into it, we were all selling homes and telling buyers that you can’t lose buying a home, and look what happened. We so share the blame.

As for the affordability index, luckily buyers haven’t bought into that bull as well, because if you bought a home in the past 3 years, it has gone down in value. And who says that the market is going to get better anytime soon. Buyers are finally showing the restraint they should have shown for the past 7 + years. Just because home prices could have dropped by a high % doesn’t mean that the home is a good value. All you’re doing is paying the new retail, and that’s no bargain. And with all due respect, you are no Warren Buffet, so the world might want to wait until he says it’s ok to dip your toe into the water once again
Gregg Cohen

I agree 100% with this article. As investors, we have to keep our sights focused on the end goal which is a return on our investment. Price is only one factor of the overall returns (and many times its the least important.) Many times investors let the emotion and thrill of “getting the best deal” corrupt their decision making process and, ultimately, their investments suffer.

What most investors don’t realize is that if you’re always looking for the absolute bottom of the market, it’s impossible for you to ever take action. That’s because you will never know for sure if you are in the bottom of the market. It’s always an insight gained on past historical data. And what’s your rate of return going to be if you never take action because you were always looking for the bottom? A big, fat 0%!

So, in order to give yourself the best chance of reaching your investment goals, you must make your investment decisions based on your expected ROI based on current market conditions. Don’t fall into the trap of always trying to get the best deal or else you’ll be sitting on the sidelines watching all the other investors who took action reach their financial goals!
brad

since when does the “median” have anything to do with the value of a home, or that prices are increasing or decreasing. Median is simply the middle. It’s the number that separates the lower half from the upper half, of all the homes that sold. It’s not an indication of prices increasing or decreasing. It’s a bogus number for the scenario presented here, which is to say that if you didn’t purchase a home and the median price went up, then the home you waited to purchase increased as well. Not true.

Someone would be incredibly stupid from using the median number to influence their buying decisions

http://www.steveharney.com Steve Harney

@Brad,
As mentioned in the blog, that is the number used by NAR to determine price movement. Which number do you suggest?

Brad

Steve, it’s impossible to use a single number, ot to use generalities for any market, since each market has several niche markets with itself.

Homes selling below $500k may be doing quite well, and it could be time to start raising the prices. Whereas, in the middle range markets in the same town it could be losing ground, and the luxury market could even be tanking…all at the same time. And that is exactly what is happening all over the country. So how can you possibly generalize the market, unless of course someone is doing it just to mislead sellers and buyers. Everyone has to analyze every market they live in.

The NAR generalizes it all the time to achieve the market condition that they want to project. They’re just as bad as the Wall Street guys are when they’re telling one group that the product is a winner, but knowing quite well that it’s a flop. It’s all done on purpose

http://www.steveharney.com Steve Harney

@ Brad,

You’re point that real estate is local of course makes sense. However, NAR uses a single number just as the DOW does, just as the S&P 500 does and just as NASDAQ does. It gives a feel for where the market is headed.

Brad

The Dow is a single number based on a formula encompassing the activity of, what 00 companies, that are a broad grouping of companies…not just one company. And the same holds true for the other stock exchanges.

As for the NAR check ot the link below from a 1000wattblog.com post, where an article in Inman point to how this mostbtrusted trade association, manipulates and manufactures and lies about the stats. They make this crap up from small sampling of numbers to achieve a positive outcome. Steve, do you condone such actions, because to me it’s criminal. Their numbers are off 10-20%. Time to fire the paid liar Lawrence Yun, and the gov’t should investigate them just as they’re doing with wall street for market manipulation.

the NAR knew that the economy was crashing, and the said nothing! You may want to stop quoting them in the future.

http://1000wattconsulting.com/blog/2011/02/friday-flash-frontdoor-fuzzy-housing-math-and-live-burrito-cam.html

http://www.steveharney.com Steve Harney

@ Brad,
A couple of points:
1.) The Dow consists of just 30 stocks yet represents the entire stock market.
2.) Have you read CoreLogic’s original study regarding the NAR inaccuracies?
3.) Have you read NAR’s actual response?
4.) Brian Boero (1000Watt) is a friend and a great mind in the real estate industry. However, he has a penchant for dismissing data from many sources in our business. As a matter of fact, I am debating him one-on-one on this issue next month in Las Vegas.

You feel very strongly on certain issues. Read the actual reports and let us know what specific points in the reports you have issues with. I love your passion and am interested in what you think after reading the full reports.

http://www.GailZaccaro.com Gail

What do you say to a buyer that is a cash buyer and can close 30 to 45 days but the seller will not accept the offer as they feel it’s to low for them. This home has been on the market for over a year and no offers.

http://www.steveharney.com Steve Harney

I would suggest that the seller read this: http://kcmblog.com/2011/02/15/selling-your-house-5-reasons-to-do-it-now/

You forgot about me

How about those of us who are waiting to buy but intend to BYPASS THE INCREASE IN INTEREST RATES by putting a lot more money down on our mortgage loan? That is, the banks make less money off of us because we decided to rent until we had enough saved up enough to laugh at interest rate increases.

Better to buy when rates are high. Home prices can only go up in such a situation. Save up and buy the house outright. Skip the interest loan. No profit for the bankers.

I noticed you didn’t mention those people in your article. Hmmm.

http://www.steveharney.com Steve Harney

@ You forgot about me
Obviously, any cash buyer will get a discount. If money is the only reason they are buying, waiting probably makes sense.

patrick.net.follower

@jill thanks so much for your comment – at least someone is willing to be honest!

Low interest rates make debt affordable, they don’t make houses affordable.
http://gnifrus.com David Mott

‘The cost of a house is made up of the price’

I have been remodeling for many years. The cost of building materials never seems to drop in price similar to what some folks think the final finished product’s price should drop to.

So, the cost in materials is pretty fixed. Labor rates can change of course. Has anyone hired a licensed contractor lately? $25-$60 an hour? They’re getting harder to find too.

Enough about the product (a home) and producing it then.

What about the lot or acreage or view or neighborhood? That also has a price. This is the main variable in my opinion. If it’s a ‘hot’ market, the place the product (home) is sitting on commands a premium. You can have the exact same home in Arizona or Alabama.

What I see in the media is ‘it’s bad everywhere’. People read these articles and then want a fairly priced home (like, you can’t buy the lot and build it for that price) at a serious discount. These folks most likely don’t own a hammer, if you can catch my drift.

I see unrealistic expectations from buyers waiting for the bottom and so on. They are waiting for folks to lose years of principal payments on top of serious down payments (of old). These reluctant sellers may have lost their jobs, and for some, all they have left is their home equity nest egg between them and the street. But hey, kick em while they’re down! Maybe you can steal their equity and brag to your friends at your cocktail parties. I’ve already heard a few stories. ‘Mankind’… what a misnomer.

Why doesn’t KCM discuss rebuild rates used by the insurance industry? This is a great number to use to get an idea of what a home is actually close to being worth.

Regards,
David Mott
mike

The “money lost” by waiting statement is a little misleading. The cost over the “life of a loan” disregards the time value of money entirely, not to mention the mortgage interest deduction. In addition very few people own a home for 30 years anymore. Price does matter as it has a much greater impact on whether you make money or are underwater on resale than the interest rate does.

Just ask the people who bought at the height of the real estate frenzy if they would rather have had a lower interest rate or a lower price when they bought.
The “how much payment can you afford” smacks of the car lot sales pitch and is very shortsighted.
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Joe Donofrio

Great presentation now I understand how have sooo successful over the years you truly live and breath real estate and you genuinely want the entire united states to understand were the market is going as well thanks for keeping current matters
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