A number of potential homebuyers are currently waiting for the market to go down. This is absolutely understandable as we’ve seen unprecedented gains over recent years. Some buyers are expecting (or hoping for) a pricing correction, but per my previous video on “Predicting the Peak”, we can’t reasonably forecast a peak for another 4 or 5 years.
Now of course, this forecast may be incorrect, however, the other issue is that even when the market does dip, it’s incredibly rare for a price drop as aggressive as it was in 2008. This chart from almost 60 years of median national house prices displays that:
So even if the peak arrives, the market probably won’t fall too far, as there are so many buyers waiting to jump on any downturn, particularly with such widely available financing options today. Buyers might be waiting for a long time before seeing a significant downturn, especially in the South Bay where land is so finite, population consistently increases and prices are insulated long term.
Regardless, house prices are quite obviously the greatest single deterrent for potential buyers from a financial standpoint. However, the larger point is that there is another financial factor that many people are overlooking, and that is mortgage rates.
Mortgage rates are still historically low and we’re getting quite comfortable with that. But sooner or later that rug will be pulled from under us. Rates quite literally only have one way to go, and we need to take notice of the average mortgage rates from the last ~60 years:
Rates have sustained themselves under 5% in recent years but have spent the majority of their lives over 6% with an average of around 7 or 8%.
Let’s take a scenario where we are purchasing a house for $850,000 with one of the popular 10% down programs…
Even with a modest rate increase of 1% from the current ~3.5% to 4.5%, the buyer will pay almost $159k more over the life of the loan. That’s 19% of the purchase price. At a closer to historically average rate of 6%, the difference is a whopping $414k, almost 50% of the purchase price! These numbers don’t even consider a historical average of ~7.5% that would of course be even higher.
It’s quite possible that the buyer would sell the property after 10 years for instance, in which case, these numbers could be cut by about a third. However, when the buyer sells, they can’t take their rate with them and will have to finance the new purchase with the new market mortgage rate, which is of course likely to be much higher than today.
If a buyer’s current fear is that they’re paying near the top of the market, they ought to weigh up the fact that they’re buying the known bottom of the mortgage market. In the long run, they’ll still quite probably pay less for their house than somebody that buys at a later date, even with a lower purchase price. (If that’s even possible, there’s every chance that prices continue to climb.) In the scenario above, they have between 19 and 49% of downside baked into their purchase price versus a conservatively projected future mortgage rate.
So the question becomes, do you think that the local housing market will fall by at least 19% in the next few years? All things considered, it seems highly unlikely to me.
Note that this logic also applies to sellers as they can lock their new property into a low rate and exist more comfortably, expressly if they think they’ll move in the next ~5 years and are moving up the ladder.
So if you’re considering a move and focusing solely on purchase price, please also contemplate that the mortgage rate is almost just as important. Even though you feel like you’re overspending on one hand, you’re definitely saving on the other, most likely to a greater extent.
Thank you for reading, as always, please feel free to reach out to me if you have any questions: firstname.lastname@example.org