Should I Wait To Buy a Home? (Part 2)

Second in a series of three posts on the financial impact of buying and selling real estate in a softening market.  You may want to read my first post before you read this one.

(NOTE:  Just like with the first post in this series, you will have to do some math, so if working with numbers makes your head explode, you may want to read one of my other blog posts.)

These scenarios are based upon a real estate market which begins to overheat (i.e. appreciation rate goes from 4% to 12% in four years), rapidly declines (i.e. appreciation rate goes from 12% to -6% in three years), then steadily climbs back to normal (i.e. appreciation rate goes from -6% to 4% in three years).

Scenario #2:

People who want to move at this time are stifled by negative and conflicting economic reports swirling around in the media.  I hear many people say, “I think I’ll wait to sell my home and buy another until the market settles down and things get back to normal.”

Response:

The first question I ask these people is, “Do you know when the real estate market will “settle down”?    There are literally thousands of experts and pundits out there, each claiming to know when this malaise will subside.   If you waited until all their varying prognostications aligned, you might still be in that tiny apartment you rented when you got out of school.  Don’t be deterred though.  By waiting until things “settled down” sellers and buyers may actually find themselves in a worse position.  Let’s look at Table #1 below that we referred to in the first scenario. 

If an individual sells their home and purchases another one in Year #7 (bottom of the market) they will actually be ahead once the market recovers.  How can that be you say?  Well, if they wait until a “normal” market rolls around in Year #10, they will sell their home for more money BUT they will also have to buy their next home for more money and obtain a mortgage on their next home that is greater than if they would have purchased at the bottom of the market.

Year 7:  $316,029 (purchase price) – $63,206 (equity) = $252,823 (mortgage)

Year 10:  $338,531 (purchase price) – $67,706 (equity) = $270,825 (mortgage)

Difference in mortgage amounts:  $18,002

Difference in monthly payments:  $107.93 (based on a rate of 6% for a term of 30 years)

By the way, interest rates right now are at historically low levels (check out my “Mortgage Info” tab).  If interest rates rise between year 7 and 10 in this example (highly probable), then the monthly payment will also increase.  So if your excuse for not selling your home in this market and buying another one is that you are going to wait until the market improves, think again.  You could find yourself saddled with a mortgage payment that is more than you bargained for.