By Geoff Smith
Assurance Financial, Branch Manager 1255 Canton St., Ste E, Roswell, GA 30075
July 21, 2023 - AssuranceMortgage.com
For many of you out there, I know in the back of your mind you secretly want to buy a house. The only thing holding you back is that you don’t have a good way to explain your logic at the next cocktail party. Well, read on. I’m about to set you free.
Many of us in the real estate world have come up with some nice slogans to try to bring you out of your shell and buy. “Marry the house and date the rate.” “Buy now, refi later”. “What are you? Scared?” Ok, not sure you’ve heard the last one much unless it was Matt Damon at last year’s Super Bowl trying to pressure you into Crypto just before that industry cratered. But if you know a Realtor, and most of you do, then you’ve probably heard something.
Well, I know that some of you are skeptical. So last month I decided to create a model to try to show in numbers what your Realtor is trying to tell you. It’s nowhere near as sexy, or simple, but there is a strong, financial case to be made in buying in this market.
The first thing I’ll say is that any investor will tell you, the best time to invest is when a market it down. And real estate has been relatively flat here in Atlanta over the last 6 months. I say ‘relatively’ because we are Atlanta. People are still moving here in droves, following corporate relocations, new manufacturing hubs and an otherwise bustling jobs market. So demand is still outpacing supply and values have not declined like in many other parts of the country.
But with inflation finally coming in line, hitting 3% last month, down from near 10% last year and close to the Fed’s 2% target, the end of the Fed’s rate increases are in site. If next month’s inflation numbers continue to drop, we might finally start the conversation of wondering aloud when the Fed will start lowering its funds rate. And maybe this time next year we’ll see rates get to the low 6%-range…or dare I say, into the 5%-range.
That said, what do you think will happen the second that conversation starts to happen and rates start to drop? There is a lot of pent-up demand and it’s possible we’ll see a rush of new buyers on the market. And when that happens, the Atlanta market will go back easily to 5% year-over-year home value increases, and more likely to increases over 10% and near what data on Zillow shows as an 8-year average of 13%. So you’d be paying a lot more next year for the same house this year.
So here is what I did. I created a spreadsheet model that compares buying a $500,000-house today and putting 20% down at 6.75% and refinancing at 4.25% a year from now; versus buying a year from now at 4.25% with home values going up a modest 5%. I also ran one with values going up 10%. I tried to make the case for waiting. It is highly unlikely rates will fall that low, but the argument for waiting is stronger with lower rates, according to my model. And by ‘stronger’ I mean you lose less money by waiting if rates drop that low.
Based on my model, if you sold that house in 5 years, you’d lose $13,621. If you sold it in 10 years, you’d lose $16,626 and your losses would peak by selling after 25 years, losing $21,206. If you wait until next year to buy and in fact keep your house for the full-term of the loan, you would then get the advantage having one year’s less in payments would almost break even.
Here is why you lose money by waiting. Not only do you lose the equity gained from the 5% rise in home value – in this case $25,000, but you’d also be paying interest on a higher loan amount. So my model takes into account the added interest paid in addition to the loss in equity.
If values rise 10%, the losses more than double. You’d lose $44,321 if you bought next year and sold your house 10 years after that. I also ran the same model, but with the scenario that you wait 2-years. It’s a lot worse.
For renters, the argument is simple and the losses from waiting are compounded by the fact that you are paying someone else’s mortgage for the next year. For those of you clinging to a lower near-3% rate on your current home, it's not quit as clear. But most of you would be moving up to a more expensive house if you plan to buy and the equity you pay down on your current home would pale in comparison to the equity gained on you new home.
I know that’s a lot of numbers. And some of you might have had to read some of these paragraphs more than once, and many probably stopped reading a while back. But for those of you still with me, and for you Realtors out there, now you understand the firepower when you say or hear “marry the house, date the rate.”
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